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Wipro Ltd. -Organization redesign announced by new CEO
Having met with management today at our 15th Annual India Investor
Conference in New Delhi, these are some of our takeaways...
„Announces organizational re-design; reiterate Neutral
Post the appointment of new CEO - Mr. T.K. Kurien, Wipro has adopted a vertical
focused design aimed at improving penetration levels in its top 25 accounts and
sharpening accountability, to help drive growth and profits. While we see this as a
step in the right direction, we have a Neutral rating as we believe the restructuring
will take at least a couple of quarters to play out and we see interim risks of BU
head churn and lateral attrition. Wipro is also less favorably positioned than its
peers in an environment of improving discretionary spends.
Adopts a more vertical focused structure
The key highlights of the proposed organization design to be effective April 1, are
1) Client facing organization to be structured by verticals with no geography
structure, to accelerate client mining. Smaller geographies like France, Germany,
Latin America and India to remain as separate units. 2) Service lines of
Application Development and Maintenance, Enterprise Applications and testing to
be merged while BPO, Infrastructure Management Services, product engineering,
consulting and analytics will remain separate service lines. However, services will
no longer be Business Units with P/L but will be measured more on competency
building. 3) Verticals or the SBUs with sole P/L responsibility regrouped with hi
tech to be merged into manufacturing, pharmaceutical currently part of
manufacturing to be merged into healthcare and metals and mining which was
currently also a part of manufacturing to be shifted to energy-utilities. 4) To
optimize cost, while 30-40% of delivery staff will remain vertical specific i.e. with
niche skills the balance will be classified by tech skills and experience and can be
shifted across verticals. Management hopes to be able to optimize the employee
pyramid by this.
Employee pyramid, Realization improvement are key
margin levers, medium term
Management views broadening of the employee pyramid as a key margin lever
going ahead and estimates up to 300bps improvement to margins from these
efforts. Increasing contribution of non-linear revenues (currently at 11% of
revenues) and improving realization (blend of higher billing rates, mix
improvement and increased quantum of fixed price projects) are the other key
levers. Wage inflation remains a key margin headwind.
Price objective basis & risk
Wipro (WIPRF / WIT)
Our Price Objective of Rs500 is set at 17x FY13e EPS, at a 20% discount to our
target multiple for Infosys. This is higher than the average P/E discount of about
15% in past 3 years due to slower earnings growth trajectory. Downside risks to
our price objective are delays in recovery of IT spending by technology and
telecom verticals apart from macro risks relating to IT spending and Rupee.
Upside risks are faster than expected success of new CEO in the rebuild process
and mining top accounts.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro Ltd. -Organization redesign announced by new CEO
Having met with management today at our 15th Annual India Investor
Conference in New Delhi, these are some of our takeaways...
„Announces organizational re-design; reiterate Neutral
Post the appointment of new CEO - Mr. T.K. Kurien, Wipro has adopted a vertical
focused design aimed at improving penetration levels in its top 25 accounts and
sharpening accountability, to help drive growth and profits. While we see this as a
step in the right direction, we have a Neutral rating as we believe the restructuring
will take at least a couple of quarters to play out and we see interim risks of BU
head churn and lateral attrition. Wipro is also less favorably positioned than its
peers in an environment of improving discretionary spends.
Adopts a more vertical focused structure
The key highlights of the proposed organization design to be effective April 1, are
1) Client facing organization to be structured by verticals with no geography
structure, to accelerate client mining. Smaller geographies like France, Germany,
Latin America and India to remain as separate units. 2) Service lines of
Application Development and Maintenance, Enterprise Applications and testing to
be merged while BPO, Infrastructure Management Services, product engineering,
consulting and analytics will remain separate service lines. However, services will
no longer be Business Units with P/L but will be measured more on competency
building. 3) Verticals or the SBUs with sole P/L responsibility regrouped with hi
tech to be merged into manufacturing, pharmaceutical currently part of
manufacturing to be merged into healthcare and metals and mining which was
currently also a part of manufacturing to be shifted to energy-utilities. 4) To
optimize cost, while 30-40% of delivery staff will remain vertical specific i.e. with
niche skills the balance will be classified by tech skills and experience and can be
shifted across verticals. Management hopes to be able to optimize the employee
pyramid by this.
Employee pyramid, Realization improvement are key
margin levers, medium term
Management views broadening of the employee pyramid as a key margin lever
going ahead and estimates up to 300bps improvement to margins from these
efforts. Increasing contribution of non-linear revenues (currently at 11% of
revenues) and improving realization (blend of higher billing rates, mix
improvement and increased quantum of fixed price projects) are the other key
levers. Wage inflation remains a key margin headwind.
Price objective basis & risk
Wipro (WIPRF / WIT)
Our Price Objective of Rs500 is set at 17x FY13e EPS, at a 20% discount to our
target multiple for Infosys. This is higher than the average P/E discount of about
15% in past 3 years due to slower earnings growth trajectory. Downside risks to
our price objective are delays in recovery of IT spending by technology and
telecom verticals apart from macro risks relating to IT spending and Rupee.
Upside risks are faster than expected success of new CEO in the rebuild process
and mining top accounts.
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