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Wipro (WPRO)
Technology
In-line quarter, simpler management structure, a positive. Wipro’s 3QFY11
performance was in line with our estimate though a touch disappointing on
composition. Underperformance on revenue growth with peers may continue in the
near term. However, steps taken by the company to simplify management structure and
improve account mining are in the right direction and will start yielding results in
FY2012E. We retain our ADD rating on relative valuation gap; low expectations help.
Headline numbers in line with our estimate, volumes growth and margin performance disappoints
Modest volume growth of 1.5% and flat margin in IT services despite +0.6% onsite and 3.7%
offshore productivity gain were the key disappointments in 3QFY11. This is however compensated
by rather strong 3-5% constant currency revenue growth guidance for 4QFY11E. Headline
numbers, i.e. IT services revenue of US$1,344 mn (+5.6% qoq, 19.3% yoy) and net income of
Rs13.2 bn (+2.6% qoq, 9.6% yoy) was in line with our estimate. Increase in size of large accounts
and growth of enterprise business are significant positives, while high attrition rate is a concern.
CEO change, a simpler structure and a meaningful positive
Joint-CEO structure, in our view, was not the most efficient utilization of high quality resources. A
move away from the joint-CEO structure is a positive, in our view. Wipro announced appointment
of TK Kurien as CEO of IT Services business. Strong entrepreneurial drive, ability to connect and
drive CXO relationships, speed in decision making and strong taskmaster approach meant that TK
was used for some of most the challenging assignments in Wipro. In our view, he has been
instrumental in turning around BPO, CMSP and consulting businesses. However, TK had mixed
performance from 2000-04; some of the strategic decisions, while heading telecom service
provider and healthcare practices, backfired. TK’s track record since 2004 has been impeccable.
Maintain estimates; retain ADD on valuation gap
We expect Wipro to underperform peers on revenue growth for the next 2-3 quarters though the
magnitude of the same may reduce further. Growth in large accounts (the company now has 3
US$ 100 mn+ and 4 US$90 mn + relationships on quarterly annualized basis), new account wins
and shift in focus to growth rather than cost management will help reduce gap in revenue growth
with peers in FY2012E. Reduction in loss making hedges in FY2012E may act as a lever in
defending margins. We forecast revenue growth of 23% in FY2012E, 4-5% pts lower than Infosys
and TCS. Earnings growth backed by stable margins may be in line with peers. Valuations at 17.8X
FY2012E and 16.1X FY2013E earnings are at 15-20% discount to peers and perhaps capture the
known negative of revenue growth underperformance. Low/ negligible expectations help. Retain
ADD with end-FY2012E fair value of Rs525.
Wipro’s volume/pricing movements have to be looked in the context of FPP shift
Wipro reported a robust 5.6% sequential US$ revenue growth despite a modest 1.5%
volume growth – blended pricing realization improvement and benefits from favorable
cross-currency movements aided the rest of the growth. We note that a lot of constant
currency pricing realization growth offshore came from a sharp 230 bps increase in
proportion of fixed-price projects (FPP) as % of revenues.
Essentially, Wipro’s non-linearity drive on the delivery side involves deriving productivity
improvements by moving projects to a fixed price engagement and doing the same with
lower resources, thereby lowering volumes while improving realizations. This has happened
in some of the previous quarters as well, as depicted in Exhibit 2. Nevertheless, the fact that
such sharp FPP increase (and associated productivity gains) did not yield meaningful margin
benefit is a tad surprising.
Sticky, high attrition is a concern
Wipro’s IT services attrition rate, at 24% annualized for the Dec 2010 quarter, remains in
the concerning territory. Wage pressure in the industry remains high (as amply
demonstrated by the margin performance of most mid-sized companies; Tier-Is continue to
show scale-led margin resilience) and with Wipro lagging the industry on wage hikes (last
revision at lower-than-industry average done in Feb 2010), we believe Wipro faces higherthan-
Tier/1-peers supply-side pressure. Nonetheless, we believe our margin estimate for
Wipro (80 bps decline assumed in FY2012E and a further 80 bps in FY2013E) builds in
ample cushion on this front.
Broadly maintain estimates; retain ADD
We broadly maintain our EPS estimates which stand at Rs25.6 for FY2012E and 28.4 for
FY2013E. Our estimates build in a US$ revenue growth assumption of 23% for FY2012E
and 17.5% for FY2013E (4-5% lower than Infosys and TCS). We retain our ADD rating on
the stock with a target price of Rs525/share.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro (WPRO)
Technology
In-line quarter, simpler management structure, a positive. Wipro’s 3QFY11
performance was in line with our estimate though a touch disappointing on
composition. Underperformance on revenue growth with peers may continue in the
near term. However, steps taken by the company to simplify management structure and
improve account mining are in the right direction and will start yielding results in
FY2012E. We retain our ADD rating on relative valuation gap; low expectations help.
Headline numbers in line with our estimate, volumes growth and margin performance disappoints
Modest volume growth of 1.5% and flat margin in IT services despite +0.6% onsite and 3.7%
offshore productivity gain were the key disappointments in 3QFY11. This is however compensated
by rather strong 3-5% constant currency revenue growth guidance for 4QFY11E. Headline
numbers, i.e. IT services revenue of US$1,344 mn (+5.6% qoq, 19.3% yoy) and net income of
Rs13.2 bn (+2.6% qoq, 9.6% yoy) was in line with our estimate. Increase in size of large accounts
and growth of enterprise business are significant positives, while high attrition rate is a concern.
CEO change, a simpler structure and a meaningful positive
Joint-CEO structure, in our view, was not the most efficient utilization of high quality resources. A
move away from the joint-CEO structure is a positive, in our view. Wipro announced appointment
of TK Kurien as CEO of IT Services business. Strong entrepreneurial drive, ability to connect and
drive CXO relationships, speed in decision making and strong taskmaster approach meant that TK
was used for some of most the challenging assignments in Wipro. In our view, he has been
instrumental in turning around BPO, CMSP and consulting businesses. However, TK had mixed
performance from 2000-04; some of the strategic decisions, while heading telecom service
provider and healthcare practices, backfired. TK’s track record since 2004 has been impeccable.
Maintain estimates; retain ADD on valuation gap
We expect Wipro to underperform peers on revenue growth for the next 2-3 quarters though the
magnitude of the same may reduce further. Growth in large accounts (the company now has 3
US$ 100 mn+ and 4 US$90 mn + relationships on quarterly annualized basis), new account wins
and shift in focus to growth rather than cost management will help reduce gap in revenue growth
with peers in FY2012E. Reduction in loss making hedges in FY2012E may act as a lever in
defending margins. We forecast revenue growth of 23% in FY2012E, 4-5% pts lower than Infosys
and TCS. Earnings growth backed by stable margins may be in line with peers. Valuations at 17.8X
FY2012E and 16.1X FY2013E earnings are at 15-20% discount to peers and perhaps capture the
known negative of revenue growth underperformance. Low/ negligible expectations help. Retain
ADD with end-FY2012E fair value of Rs525.
Wipro’s volume/pricing movements have to be looked in the context of FPP shift
Wipro reported a robust 5.6% sequential US$ revenue growth despite a modest 1.5%
volume growth – blended pricing realization improvement and benefits from favorable
cross-currency movements aided the rest of the growth. We note that a lot of constant
currency pricing realization growth offshore came from a sharp 230 bps increase in
proportion of fixed-price projects (FPP) as % of revenues.
Essentially, Wipro’s non-linearity drive on the delivery side involves deriving productivity
improvements by moving projects to a fixed price engagement and doing the same with
lower resources, thereby lowering volumes while improving realizations. This has happened
in some of the previous quarters as well, as depicted in Exhibit 2. Nevertheless, the fact that
such sharp FPP increase (and associated productivity gains) did not yield meaningful margin
benefit is a tad surprising.
Sticky, high attrition is a concern
Wipro’s IT services attrition rate, at 24% annualized for the Dec 2010 quarter, remains in
the concerning territory. Wage pressure in the industry remains high (as amply
demonstrated by the margin performance of most mid-sized companies; Tier-Is continue to
show scale-led margin resilience) and with Wipro lagging the industry on wage hikes (last
revision at lower-than-industry average done in Feb 2010), we believe Wipro faces higherthan-
Tier/1-peers supply-side pressure. Nonetheless, we believe our margin estimate for
Wipro (80 bps decline assumed in FY2012E and a further 80 bps in FY2013E) builds in
ample cushion on this front.
Broadly maintain estimates; retain ADD
We broadly maintain our EPS estimates which stand at Rs25.6 for FY2012E and 28.4 for
FY2013E. Our estimates build in a US$ revenue growth assumption of 23% for FY2012E
and 17.5% for FY2013E (4-5% lower than Infosys and TCS). We retain our ADD rating on
the stock with a target price of Rs525/share.
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