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Charting a different growth path
Wipro’s Q3FY11 performance was in line with expectation but was overshadowed
by the sudden announcement that its joint CEOs, Mr. Girish Paranjpe and
Mr. Suresh Vaswani, have resigned and will be leaving the organization in March
2011. The company appointed Mr. T K Kurien (who was heading the eco-energy
initiative) as the new CEO. Wipro reported IT revenue of USD 1.34 bn, 5.6%
Q-o-Q growth, similar to Infosys’ 6%. But, growth was almost entirely driven by
higher realizations. It reported disappointing volume growth of just 1.5% Q-o-Q
(offshore volume growth of just 0.5%) but offshore realizations jumped 3.8%
Q-o-Q. The company currently derives 11% of revenue through non-linear
initiatives compared to 8% in FY10 and plans to raise it to 15% next year. Thus,
it believes, revenue growth will outpace volume growth, unlike peers.
Four CEO changes in past 10 years
The Street has had complaints on Wipro’s performance relative to peers for the
past three years. Its margin performance has been inferior to larger peers
Infosys and TCS, largely believed to be due to poor execution. In the past four
quarters, its revenue growth has lagged peers. While the company stated that
the joint CEOs have decided to step down, we believe the relative under
performance to its peers could have been the trigger for their exit. Wipro has
had four CEO changes over the past 10 years due to various reasons. It has seen
a number of senior management exits in the past five years as well. We note
that the company’s revenue and EBIT growth have not been too different from
Infosys in the past few years. But TCS’ transformation by outpacing growth and
narrowing the margin gap with Infosys seems to create an impression that Wipro
has been found wanting on these two counts.
Outlook and valuations: Uncertainties ahead; maintain ‘HOLD’
Wipro’s Q3FY11 performance was in line with expectation, although the
combination of price and volume was in variance with Street expectations. Its
guidance of 3-5% Q-o-Q revenue growth is reasonable. But its decision to
consider salary hikes in April 2011, post a gap of 15 months since the previous
salary hike, is concerning as it could impact execution. The new CEO typically
will also adopt a new strategy and hence during transition business could get
impacted (growth/margins). The stock is trading at 17.4x FY12E earnings, a
21% discount to Infosys. Given relative uncertainty to peers, we maintain
‘HOLD/ Sector Underperformer’ recommendation/rating on the stock.
Key highlights
• IT services revenues, at USD 1,344 mn, up 5.6% Q-o-Q, were slightly higher than
our expectations (USD 1,333 mn). In constant currency, revenues were at USD
1,325 mn above the guided USD 1,317-1343 mn. Overall revenues, at INR 78.2 bn,
rose 0.6% Q-o-Q primarily due to tepid volume growth of 1.5% Q-o-Q.
• Gross profit for the quarter, at INR 24.7 bn, grew a meager 0.9% Q-o-Q and 14.1%
Y-o-Y. Gross margins, at 31.5%, were flat sequentially.
• Operating profit (EBIT) for the quarter stands at INR 14.7 bn, down 1.3% Q-o-Q.
EBIT margin, at 18.2%, dipped 40bps Q-o-Q due to higher G&A expenses.
• Wipro’s net margin, at 16.9%, jumped 40bps Q-o-Q. Net profit stood at INR 13.2 bn,
up 2.6% sequentially, primarily on account of higher other income and foreign
exchange gain of INR 91 mn versus loss of INR 414 mn in the previous quarter.
• Decent headcount addition: Wipro added 3,591 net employees in the quarter,
taking its total headcount to 119,491. Quarterly annualized attrition for global IT
declined by 180bps to 21.7% versus 23.5% in the previous quarter.
• Utilisation downtrend continues for global IT: Utilisation for IT services dipped
to 68.6% (down 230bps Q-o-Q); it has declined 460bps (73.2% in Q3FY10) in five
consecutive quarters.
• IT services business
IT services revenues stood at INR 59.5 bn (USD 1,344 mn), representing
sequential growth of 3.5% in INR and 4.1% in USD. On constant currency basis,
revenues were at USD 1,325 mn. Overall volume for the quarter showed a tepid
growth of 1.5%, offshore volumes rose marginally by 0.5% Q-o-Q, while onsite
volume was up 4.0% Q-o-Q.
Realisations: On reported basis, onsite realisations increased 0.6% Q-o-Q and
offshore by 3.8% Q-o-Q. On constant currency basis, realisation increased 0.8%
and 2.5% for onsite and offshore, respectively.
EBIT, at INR 13.2 bn, grew 3.6% Q-o-Q while EBIT margin was flat at 22.2%.
Q4 guidance: For IT services, the company has given a guidance of USD 1,384-
1,411 mn (implied growth of 3-5% Q-o-Q).
• IT products business
Revenues, at INR 8.8 bn, nosedived 17.8% Q-o-Q. EBIT stands at INR 408 mn,
down 23.5%, against the previous quarter. EBIT margin dipped 40bps Q-o-Q to
4.6%.
• Customer care and lighting business
Revenue for this segment grew 4.5% Q-o-Q to INR 7.0 bn. EBIT grew 2.8%
sequentially to INR 855 mn. Operating margins stood at 12.3% (down 20bps Qo-
Q).
• Service line performance: All the service lines, except product engineering services,
reported sequential growth during the quarter with strong momentum in ADM and
technology infra. services, posting sequential growth of 9.7% and 6.6%, respectively.
• Energy & utilities, CMSP, financial services and manufacturing drive growth
with 16.2%, 8.0%, 7.2%, and 6.3% sequential growth, respectively. While
healthcare and technology declined 4.0% and 3.4% Q-o-Q, respectively
• Broad-based growth across geographies: Europe led growth with 12.8%
sequential growth; India and Middle East grew 5.6% Q-o-Q, whereas emerging
markets continued good show for seventh successive quarter by growing 4.1% Q-o-
Q. North America grew 2.4% Q-o-Q.
• Client metrics continue to post positive trend: Wipro added 36 clients during
the quarter. Active client count stood at 880 versus 890 in the previous quarter. Key
notable development is the addition of 7, 1, and 1 clients in the USD 10 mn, USD 20
mn, and USD 50 mn categories, respectively.
• Hedge position: Total hedge position stood at USD 1.5 bn as at Q3FY11 end.
Company Description
Wipro is a leading Indian company with business interests in export of IT & BPO services,
domestic hardware, consumer lighting, and consumer care. It has the widest range of
services, including systems integration, IT-enabled services, package implementation,
software application development & maintenance, and R&D services. Wipro is the first P
CMM Level 5 and SEI CMM Level 5-certified IT services company in the world. It has
more than 845 clients spanning the BFSI, manufacturing, retail, utilities, and telecom
verticals. Wipro has over 119,491 employees. The company’s revenues for the past
twelve months stood at INR 298 bn (USD 6.5 bn).
Investment Theme
Early investments in new service lines such as BPO, infrastructure management, and
testing highlight the company’s endeavor to be looked upon as a one-stop end-to-end
integrated solutions provider. The successful transition in the BPO from voice to nonvoice
business is a good example of this focus. Being the leader in infrastructuremanagement
and testing services too opens up good opportunities for the company,
which along with its peers is in pursuit of multiple mega off-shoring deals in the industry.
Further, with the recalibrated sales force the order book accretion has been improving.
Key Risks
Key risks to our investment theme include – double dip recession in major market US
and prolonged slowdown in Europe, sharp cross currency movements and appreciation of
rupee against USD, Euro and GBP and low bench strength may impact the ability to cater
to rapid increase in volume.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Charting a different growth path
Wipro’s Q3FY11 performance was in line with expectation but was overshadowed
by the sudden announcement that its joint CEOs, Mr. Girish Paranjpe and
Mr. Suresh Vaswani, have resigned and will be leaving the organization in March
2011. The company appointed Mr. T K Kurien (who was heading the eco-energy
initiative) as the new CEO. Wipro reported IT revenue of USD 1.34 bn, 5.6%
Q-o-Q growth, similar to Infosys’ 6%. But, growth was almost entirely driven by
higher realizations. It reported disappointing volume growth of just 1.5% Q-o-Q
(offshore volume growth of just 0.5%) but offshore realizations jumped 3.8%
Q-o-Q. The company currently derives 11% of revenue through non-linear
initiatives compared to 8% in FY10 and plans to raise it to 15% next year. Thus,
it believes, revenue growth will outpace volume growth, unlike peers.
Four CEO changes in past 10 years
The Street has had complaints on Wipro’s performance relative to peers for the
past three years. Its margin performance has been inferior to larger peers
Infosys and TCS, largely believed to be due to poor execution. In the past four
quarters, its revenue growth has lagged peers. While the company stated that
the joint CEOs have decided to step down, we believe the relative under
performance to its peers could have been the trigger for their exit. Wipro has
had four CEO changes over the past 10 years due to various reasons. It has seen
a number of senior management exits in the past five years as well. We note
that the company’s revenue and EBIT growth have not been too different from
Infosys in the past few years. But TCS’ transformation by outpacing growth and
narrowing the margin gap with Infosys seems to create an impression that Wipro
has been found wanting on these two counts.
Outlook and valuations: Uncertainties ahead; maintain ‘HOLD’
Wipro’s Q3FY11 performance was in line with expectation, although the
combination of price and volume was in variance with Street expectations. Its
guidance of 3-5% Q-o-Q revenue growth is reasonable. But its decision to
consider salary hikes in April 2011, post a gap of 15 months since the previous
salary hike, is concerning as it could impact execution. The new CEO typically
will also adopt a new strategy and hence during transition business could get
impacted (growth/margins). The stock is trading at 17.4x FY12E earnings, a
21% discount to Infosys. Given relative uncertainty to peers, we maintain
‘HOLD/ Sector Underperformer’ recommendation/rating on the stock.
Key highlights
• IT services revenues, at USD 1,344 mn, up 5.6% Q-o-Q, were slightly higher than
our expectations (USD 1,333 mn). In constant currency, revenues were at USD
1,325 mn above the guided USD 1,317-1343 mn. Overall revenues, at INR 78.2 bn,
rose 0.6% Q-o-Q primarily due to tepid volume growth of 1.5% Q-o-Q.
• Gross profit for the quarter, at INR 24.7 bn, grew a meager 0.9% Q-o-Q and 14.1%
Y-o-Y. Gross margins, at 31.5%, were flat sequentially.
• Operating profit (EBIT) for the quarter stands at INR 14.7 bn, down 1.3% Q-o-Q.
EBIT margin, at 18.2%, dipped 40bps Q-o-Q due to higher G&A expenses.
• Wipro’s net margin, at 16.9%, jumped 40bps Q-o-Q. Net profit stood at INR 13.2 bn,
up 2.6% sequentially, primarily on account of higher other income and foreign
exchange gain of INR 91 mn versus loss of INR 414 mn in the previous quarter.
• Decent headcount addition: Wipro added 3,591 net employees in the quarter,
taking its total headcount to 119,491. Quarterly annualized attrition for global IT
declined by 180bps to 21.7% versus 23.5% in the previous quarter.
• Utilisation downtrend continues for global IT: Utilisation for IT services dipped
to 68.6% (down 230bps Q-o-Q); it has declined 460bps (73.2% in Q3FY10) in five
consecutive quarters.
• IT services business
IT services revenues stood at INR 59.5 bn (USD 1,344 mn), representing
sequential growth of 3.5% in INR and 4.1% in USD. On constant currency basis,
revenues were at USD 1,325 mn. Overall volume for the quarter showed a tepid
growth of 1.5%, offshore volumes rose marginally by 0.5% Q-o-Q, while onsite
volume was up 4.0% Q-o-Q.
Realisations: On reported basis, onsite realisations increased 0.6% Q-o-Q and
offshore by 3.8% Q-o-Q. On constant currency basis, realisation increased 0.8%
and 2.5% for onsite and offshore, respectively.
EBIT, at INR 13.2 bn, grew 3.6% Q-o-Q while EBIT margin was flat at 22.2%.
Q4 guidance: For IT services, the company has given a guidance of USD 1,384-
1,411 mn (implied growth of 3-5% Q-o-Q).
• IT products business
Revenues, at INR 8.8 bn, nosedived 17.8% Q-o-Q. EBIT stands at INR 408 mn,
down 23.5%, against the previous quarter. EBIT margin dipped 40bps Q-o-Q to
4.6%.
• Customer care and lighting business
Revenue for this segment grew 4.5% Q-o-Q to INR 7.0 bn. EBIT grew 2.8%
sequentially to INR 855 mn. Operating margins stood at 12.3% (down 20bps Qo-
Q).
• Service line performance: All the service lines, except product engineering services,
reported sequential growth during the quarter with strong momentum in ADM and
technology infra. services, posting sequential growth of 9.7% and 6.6%, respectively.
• Energy & utilities, CMSP, financial services and manufacturing drive growth
with 16.2%, 8.0%, 7.2%, and 6.3% sequential growth, respectively. While
healthcare and technology declined 4.0% and 3.4% Q-o-Q, respectively
• Broad-based growth across geographies: Europe led growth with 12.8%
sequential growth; India and Middle East grew 5.6% Q-o-Q, whereas emerging
markets continued good show for seventh successive quarter by growing 4.1% Q-o-
Q. North America grew 2.4% Q-o-Q.
• Client metrics continue to post positive trend: Wipro added 36 clients during
the quarter. Active client count stood at 880 versus 890 in the previous quarter. Key
notable development is the addition of 7, 1, and 1 clients in the USD 10 mn, USD 20
mn, and USD 50 mn categories, respectively.
• Hedge position: Total hedge position stood at USD 1.5 bn as at Q3FY11 end.
Company Description
Wipro is a leading Indian company with business interests in export of IT & BPO services,
domestic hardware, consumer lighting, and consumer care. It has the widest range of
services, including systems integration, IT-enabled services, package implementation,
software application development & maintenance, and R&D services. Wipro is the first P
CMM Level 5 and SEI CMM Level 5-certified IT services company in the world. It has
more than 845 clients spanning the BFSI, manufacturing, retail, utilities, and telecom
verticals. Wipro has over 119,491 employees. The company’s revenues for the past
twelve months stood at INR 298 bn (USD 6.5 bn).
Investment Theme
Early investments in new service lines such as BPO, infrastructure management, and
testing highlight the company’s endeavor to be looked upon as a one-stop end-to-end
integrated solutions provider. The successful transition in the BPO from voice to nonvoice
business is a good example of this focus. Being the leader in infrastructuremanagement
and testing services too opens up good opportunities for the company,
which along with its peers is in pursuit of multiple mega off-shoring deals in the industry.
Further, with the recalibrated sales force the order book accretion has been improving.
Key Risks
Key risks to our investment theme include – double dip recession in major market US
and prolonged slowdown in Europe, sharp cross currency movements and appreciation of
rupee against USD, Euro and GBP and low bench strength may impact the ability to cater
to rapid increase in volume.
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