Wipro - Lack of ‘xing’ in results, retain REDUCE :: Emkay

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Wipro Ltd

Lack of ‘xing’ in results, retain REDUCE

REDUCE

CMP: Rs 478                                       Target Price: Rs 440

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n     Rev at US$ 1,344 mn (+5.6% QoQ), mgnally lower than est, IT services EBIT mgns flat QoQ at 22.2% (V/s +50 bps exp). Profits in line with est at RS 13.2 bn (+2.6%, +9.6% YoY)

n     Vol growth at 1.5% QoQ trails peers, price realizations up by ~2.9% sequentially driven by ~230 bps increase in Fixed bid proportion of revenues to 46.3%

n     Co announced a change at the top helm with a single CEO  strategy now as it attempts to address underperformance V/s peers

n     Increase FY12/13E earnings by ~6%/3% to Rs 24.5/26.8 driven primarily by lower currency reset. Maintain REDUCE with a revised TP of Rs 440(V/s Rs 420 earlier)

Just about matches expectations, but does it matter

QoQ rev growth at 5.6%, with lackluster vol gwth at 1.5% continues to lag peers’ (Infy

+3.1%, TCS +5.7%). Rev gwth was lead by pricing increase with onsite/offshore rev

productivity up by ~0.6/ 3.8% QoQ helped by increase in fixed price projects by ~230

bps QoQ to 46.3%. IT Svcs EBIT mgns were flat QoQ at 22.2% V/s expectations of ~50

bps increase despite relatively tepid hiring ( net HC adds at ~3,500). Growth was well

spread across the clients with top/top 5/non top10 clients growing by 9.2%/5.6%/5.6%

QoQ respectively. Attrition continues to be ahead of peers for Wipro at 21.6% on a LTM

basis and in our view remains an area of concern for Wipro, (Infy 17.5%, TCS 14.4%).

Co has indicated that it is shifting its Feb cycle wage revision to April month now.

Yet another change in Leadership

In a surprise move, Wipro announced a change at the top helm and thus bringing to an

end it’s dual CEO strategy which worked extremely well for the company during the

downturn in an attempt to cut underperformance V/s other peers. Mr TK Kurien, an old

veteran who until recently was heading Wipro’s ECO Energy business has been

entrusted with driving growth for the company ahead. Although Mr Kurien ‘s previous

track record at turning around BPO business over FY05-07 remains

commendable, we believe that Wipro’s growth underperformance is more a

resultant of a weaker client mining (a fact highlighted more frequently in the

recent past) and higher exposure to lower growth areas (read ‘telecom OEM’s and

Hi Tech’, also refer to our notes in Feb’09 and Oct’10 on the same)

Tweak FY12/13E earnings up by 6%/3% driven by lower currency resets,

retain REDUCE with a revised TP of Rs 440

We tweak our earnings model for marginally higher US$ revenue estimates (note that

we build in~19%/20.6%/17% YoY revenue growth for FY11/12/13 V/s

19%/18.5%/16.5% earlier and higher growth for peers Infosys and TCS) and reset

currency assumptions to Rs 45/$ driving a 6%/3% raise in our earnings estimates to Rs

24.5 and Rs 26.8 for FY12E/FY13E respectively. Despite relative discount to peers

appears alluring, we believe that it remains justified on Wipro’s operational

underperformance vis-à-vis peers. Retain REDUCE with a revised TP of Rs 440.