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Wipro Ltd.
▲ Overweight
Previous: Neutral
WIPR.BO, WPRO IN
Below-peer growth expectation is in the current price,
upgrade to OW on new management promise and
visibly stronger orientation towards higher growth
• The Wipro stock has been a major laggard in the past 12 months. This
underperformance is pronounced in the last month as concerns on senior
management change, potential attrition of senior staff and continued doubts on
ability to keep pace with peers have weighed on the stock. The organizational
changes announced have a clear mandate to deliver higher growth than achieved
in the recent past. Valuation at 14.8x FY13E P/E stands at ~17% discount to
Infosys’s FY13E P/E, an all-time high, (except for the brief period post
Lehman when we saw flight-to-safety towards Infosys). Additionally, we
believe the current reasonable valuations for FY12/13E factor in the expectation
that Wipro’s revenue growth would continue to lag behind that of TCS/Infosys
by 3-5% for the next two years (FY12/FY13).
• In our view, the company and its new CEO TK Kurien have identified the
structural issues that have held Wipro’s growth back in the recent past. We see
substantial action has already taken on some of them and so, we are optimistic.
• We think Wipro is more a FY13 story than a FY12 story. We believe that
the course of corrective actions that the new management has embarked on is
comprehensive. With a company of Wipro’s size, it takes time to see the fruit of
these executions. Our report discusses this in detail. As the company refocuses
its areas of investments and adopts a more customer-centric structure, near-term
margins of IT-Services may not necessarily paint a good picture of the likely
revenue/margin profile for FY13. We believe investors need to look beyond
margins over the next 2-3 quarters (provided they remain in a narrow range of
22% EBIT, which we believe will be the case).
• We upgrade Wipro to OW, roll over price target to Mar-12 and establish a
Mar-12 price target of Rs540 (from Sep-11 price target of Rs470). We
construct two scenarios: (a) the company does not deliver – status quo is
maintained; (b) the company delivers on the higher growth agenda by FY13 and
revenue growth matches peers (TCS/Infosys). Our PT (giving 25% upside from
the current levels) corresponds to our base-case of ‘company-will-not-deliverby-
FY13’ scenario. In the ‘company-will-deliver-higher-growth-by-FY13’
scenario, the share price upside could be higher by another 10% points,
potentially returning 35% upside from the current levels. TCS (OW) has been
our top pick hitherto. However, under our base-case (risk-adjusted) scenario,
Wipro should provide sector-leading investor returns of ~25% over 12 months.
Introduction
In our view, the new CEO TK Kurien and the reorganized management structure has
identified most of the structural issues that in the recent past have held Wipro’s
growth back. Some of this have to do with: (a) the need for an integrated positioning
for better client mining and in accordance with that establish single point of
accountability, (b) eliminating redundancies in the system as a result of the joint-
CEO structure, a relative quick-fix, (c) hiring of client engagement managers and
program managers who can talk the language of domain (as opposed to merely
technology), (d) over-tightening of the supply side (employees), as a result of undue
focus on margins during the downturn.
There is an encouraging appreciation of the challenges that lie ahead and what
needs to be done to address them. We identify below some of the chief systemic
issues that the new CEO and his team will have to contend with. Encouragingly,
Wipro seems to have identified the issues and have already substantially acted on
some of them.
Issue no. 1: One-time change acceptable and Wipro has
effected minimal changes in personnel
Wipro has effected minimal changes/rotation of personnel announced after TK
Kurien’s appointment. The only notable shift of portfolio has been for Ms Sangita
Singh who, earlier in charge of a horizontal (namely Enterprise solutions/ERP), is
now charged with managing the healthcare vertical – an altogether different domain.
Some part of technology now moves to manufacturing (headed by Mr. NS Bala),
who is now responsible for a larger portfolio.
We believe it is important for the new CEO to assure stability after these
changes. The beneficial consequences of the changes will likely take time to
materialize (hence, our view that FY12 will be the period of settling in and
seeing the changes happen but FY13 should see the full impact of these
changes). However, changes cannot be an ongoing exercise and we believe that the
Wipro management is cognizant of the need to ensure stability and coherence.
Cognizant and TCS tell us that their business heads and senior personnel have been
largely wedded to their domains (be they vertical and horizontal) for well over a
decade and that is a factor in providing customers a sense of comfort and assurance
of continuity. Studying Infosys’ management structure over the last three years, we
note that the primary changes relate to additional responsibility for management (e.g.
members of the executive council), not a change in core responsibility with few
exceptions (likewise for TCS).
Issue no. 2: Engagement approach towards existing clients
needs to improve which Wipro is working on
Wipro fares well in winning new deals and in this respect it compares rather
respectably with peers, in our view. Its positioning strength lies in system integration,
infrastructure management and BPO. That said, we think its weakness lies in
managing the client thereafter and making the account count. We know of several
instances where Wipro made inroads into marquee clients, only later to cede ground
to competitors to penetrate such accounts. We think its track record in multi-vendor
situations needs to improve. This is reflected in top-10 client account statistics which
point to Wipro’s less-than-impressive record of client mining. TCS derives 3 times as
much contribution (in absolute US$ terms) from its top-10 clients as compared to
Wipro.
Some of the reasons that we believe that Wipro has not fared well on this count
include:
• Slowness in making needed investments in mining existing accounts –
Inability to create the right account management structure in a tiered
fashion across strategic accounts (consulting partner, client partner, client
engagement manager and enterprise architects) - profiles of such high-end
professionals are scarce but they do make a difference in front of the client
especially in complex, unstructured deals.
• Inability to take an integrated view of a particular account that would enable
cross-sell and up-sell. We believe that the ‘One Wipro’ positioning is still
not as firmly embedded as the ‘One Infosys’ and ‘One TCS’ image.
However, with single point of accountability on key accounts, Wipro
hopes to plug this gap,
• A shortfall in large-scale program management firepower,
• Delay in integrating domain intensity into the relationships as opposed to
technology and seemingly weak prioritization of accounts and accordingly
allocation of resources.
For a company of its size, we believe the quality of growth could improve only with
larger sizes of client accounts. In our view, growth which primarily depends on
increasing the count of clients with USD 30-40 mn in size is decidedly inferior and
less scalable than one that accrues from cultivating much larger account sizes.
Cognizant’s top-5 and top-10 clients yield 58% and 44% more than Wipro’s top-5
and top-10 accounts, respectively, despite comparable overall size. The whole
difference between Infosys’ and Wipro’s revenues in FY09 and FY10 came from the
top-10 clients, whereas 50% of the revenue differential between TCS and Wipro
came from the top-10 clients.
Wipro’s client approach is thus far primarily hunting and not as mining-led.
Essentially, we believe its market-facing approach needs to be more intensive
and in-depth rather than expansive.
Is Wipro doing enough to work on these aspects? We believe so – the company
has changed the profile of its client engagement managers over the past 4-6
quarters, staffed its strategic accounts adequately and re-allocated personnel
where necessary. It has established/is establishing single point of
accountabilities with single P&L ownership of key accounts which facilitates
cross-selling, up-selling and mining. It is also localizing much more significantly
in tougher geographies for improved penetration.
Issue no. 3: Management of the supply-side has not been
very effective – but the company could relent on near-term
margin demands
For the year-ended FY10, Wipro’s involuntary attrition in IT-Services stood at 6.2%
(4x TCS and 2x Infosys). Also, as per our tracking, despite its size, Wipro does not
enjoy the prime slot status in several of the engineering campuses it hires from where
Cognizant, Infosys, TCS and MNCs such as Accenture/IBM also hire.
Behind the curve in keeping with wage inflation; more variability in pay can be
injected to manage attrition. We think Wipro has also been behind the curve in
giving salary hikes and when it did (as in February 2010), the average offshore payout
hike was just 8-10% (as against 14-15% by peers two months later in April
2010). To some extent, the company has corrected this with a promotion-based hike
effective July-10, which provides another 4%. However, we note that the last
offshore wage hike prior to Feb 10 happened in Aug-08 (18 months back, 8-10%
increase on that occasion as well).
In our view, too much tightening of the supply-side in favor of margins during the
downturn has resulted in subsequent, high attrition. In the current environment
which is constrained by supply and not by demand, high attrition, if unchecked,
can potentially result in lost revenues (though it has not happened in 3QFY11 as
utilization was sub-par). Some of the increase in wage could be made variable,
as TCS has effected.
Financial performance evaluation
Scenario 1: Company does not deliver growth agenda and status quo
maintained (our base case). Under this scenario, we estimate FY13 revenue growth
for the company stands between 18-20% (USD). FY13E EPS of the company is
Rs29.2. In our view, the appropriate multiple in this as-is scenario is 18.5x (15%
discount to TCS per our estimate).
Scenario 2: Company delivers on growth agenda. Under this scenario, FY13E
revenue growth for the company would be in line with peers (22% or above). FY13E
EPS of the company under this scenario would be Rs30.8. In our view, the
appropriate multiple in this as-is scenario is 19.5x (an 8% discount to TCS per our
estimate). This would push up the price target from the as-is scenario by a further
~10%.
Valuation and price target
Current valuations represent an all-time discount of 17% to Infosys (excluding the
brief period post the Lehman collapse when Infosys saw a flight-to-safety
Setting our price target. Our Mar-12 price target of Rs540 is based on one-year
forward/trailing P/E multiple of 18.5x – this is at a 15% discount to TCS’s target P/E
multiple of 22x. We take TCS as our benchmark multiple in the Indian IT universe.
This assumes the conservative scenario that the management does not deliver abovetrend
growth rates in FY12 which matches that of peers (TCS/Infosys).
Downward risks to our price target
Specific to Wipro, under the new management/CEO, a key downside risk is if the
growth profile for FY13 comes in lower than what the company should naturally
achieve at the minimum (18-20% USD revenue growth in FY13). The probability of
this playing out is minimal, in our view. More generally, a sharp slowdown in IT
spending environment and appreciation of the rupee against the US dollar are key
risks to our price target.
Upward risks to our price target
Specific to Wipro, under the new management/CEO, a key upside risk is if the
growth profile for FY13 exceeds 18-20% in FY13 to hit 22-23%, in line with peers.
This would result in a further 10% upside to our base case Mar-12 price target (from
Rs540 to Rs595). However, this does not represent our base case as we seek a margin
of safety. Other upside risks include faster recovery of developed economies,
particularly the US, and large deal wins, resulting in upgrades to our FY12/13
estimates.
Wipro (OW) now becomes our key pick in the sector, together with TCS (OW).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro Ltd.
▲ Overweight
Previous: Neutral
WIPR.BO, WPRO IN
Below-peer growth expectation is in the current price,
upgrade to OW on new management promise and
visibly stronger orientation towards higher growth
• The Wipro stock has been a major laggard in the past 12 months. This
underperformance is pronounced in the last month as concerns on senior
management change, potential attrition of senior staff and continued doubts on
ability to keep pace with peers have weighed on the stock. The organizational
changes announced have a clear mandate to deliver higher growth than achieved
in the recent past. Valuation at 14.8x FY13E P/E stands at ~17% discount to
Infosys’s FY13E P/E, an all-time high, (except for the brief period post
Lehman when we saw flight-to-safety towards Infosys). Additionally, we
believe the current reasonable valuations for FY12/13E factor in the expectation
that Wipro’s revenue growth would continue to lag behind that of TCS/Infosys
by 3-5% for the next two years (FY12/FY13).
• In our view, the company and its new CEO TK Kurien have identified the
structural issues that have held Wipro’s growth back in the recent past. We see
substantial action has already taken on some of them and so, we are optimistic.
• We think Wipro is more a FY13 story than a FY12 story. We believe that
the course of corrective actions that the new management has embarked on is
comprehensive. With a company of Wipro’s size, it takes time to see the fruit of
these executions. Our report discusses this in detail. As the company refocuses
its areas of investments and adopts a more customer-centric structure, near-term
margins of IT-Services may not necessarily paint a good picture of the likely
revenue/margin profile for FY13. We believe investors need to look beyond
margins over the next 2-3 quarters (provided they remain in a narrow range of
22% EBIT, which we believe will be the case).
• We upgrade Wipro to OW, roll over price target to Mar-12 and establish a
Mar-12 price target of Rs540 (from Sep-11 price target of Rs470). We
construct two scenarios: (a) the company does not deliver – status quo is
maintained; (b) the company delivers on the higher growth agenda by FY13 and
revenue growth matches peers (TCS/Infosys). Our PT (giving 25% upside from
the current levels) corresponds to our base-case of ‘company-will-not-deliverby-
FY13’ scenario. In the ‘company-will-deliver-higher-growth-by-FY13’
scenario, the share price upside could be higher by another 10% points,
potentially returning 35% upside from the current levels. TCS (OW) has been
our top pick hitherto. However, under our base-case (risk-adjusted) scenario,
Wipro should provide sector-leading investor returns of ~25% over 12 months.
Introduction
In our view, the new CEO TK Kurien and the reorganized management structure has
identified most of the structural issues that in the recent past have held Wipro’s
growth back. Some of this have to do with: (a) the need for an integrated positioning
for better client mining and in accordance with that establish single point of
accountability, (b) eliminating redundancies in the system as a result of the joint-
CEO structure, a relative quick-fix, (c) hiring of client engagement managers and
program managers who can talk the language of domain (as opposed to merely
technology), (d) over-tightening of the supply side (employees), as a result of undue
focus on margins during the downturn.
There is an encouraging appreciation of the challenges that lie ahead and what
needs to be done to address them. We identify below some of the chief systemic
issues that the new CEO and his team will have to contend with. Encouragingly,
Wipro seems to have identified the issues and have already substantially acted on
some of them.
Issue no. 1: One-time change acceptable and Wipro has
effected minimal changes in personnel
Wipro has effected minimal changes/rotation of personnel announced after TK
Kurien’s appointment. The only notable shift of portfolio has been for Ms Sangita
Singh who, earlier in charge of a horizontal (namely Enterprise solutions/ERP), is
now charged with managing the healthcare vertical – an altogether different domain.
Some part of technology now moves to manufacturing (headed by Mr. NS Bala),
who is now responsible for a larger portfolio.
We believe it is important for the new CEO to assure stability after these
changes. The beneficial consequences of the changes will likely take time to
materialize (hence, our view that FY12 will be the period of settling in and
seeing the changes happen but FY13 should see the full impact of these
changes). However, changes cannot be an ongoing exercise and we believe that the
Wipro management is cognizant of the need to ensure stability and coherence.
Cognizant and TCS tell us that their business heads and senior personnel have been
largely wedded to their domains (be they vertical and horizontal) for well over a
decade and that is a factor in providing customers a sense of comfort and assurance
of continuity. Studying Infosys’ management structure over the last three years, we
note that the primary changes relate to additional responsibility for management (e.g.
members of the executive council), not a change in core responsibility with few
exceptions (likewise for TCS).
Issue no. 2: Engagement approach towards existing clients
needs to improve which Wipro is working on
Wipro fares well in winning new deals and in this respect it compares rather
respectably with peers, in our view. Its positioning strength lies in system integration,
infrastructure management and BPO. That said, we think its weakness lies in
managing the client thereafter and making the account count. We know of several
instances where Wipro made inroads into marquee clients, only later to cede ground
to competitors to penetrate such accounts. We think its track record in multi-vendor
situations needs to improve. This is reflected in top-10 client account statistics which
point to Wipro’s less-than-impressive record of client mining. TCS derives 3 times as
much contribution (in absolute US$ terms) from its top-10 clients as compared to
Wipro.
Some of the reasons that we believe that Wipro has not fared well on this count
include:
• Slowness in making needed investments in mining existing accounts –
Inability to create the right account management structure in a tiered
fashion across strategic accounts (consulting partner, client partner, client
engagement manager and enterprise architects) - profiles of such high-end
professionals are scarce but they do make a difference in front of the client
especially in complex, unstructured deals.
• Inability to take an integrated view of a particular account that would enable
cross-sell and up-sell. We believe that the ‘One Wipro’ positioning is still
not as firmly embedded as the ‘One Infosys’ and ‘One TCS’ image.
However, with single point of accountability on key accounts, Wipro
hopes to plug this gap,
• A shortfall in large-scale program management firepower,
• Delay in integrating domain intensity into the relationships as opposed to
technology and seemingly weak prioritization of accounts and accordingly
allocation of resources.
For a company of its size, we believe the quality of growth could improve only with
larger sizes of client accounts. In our view, growth which primarily depends on
increasing the count of clients with USD 30-40 mn in size is decidedly inferior and
less scalable than one that accrues from cultivating much larger account sizes.
Cognizant’s top-5 and top-10 clients yield 58% and 44% more than Wipro’s top-5
and top-10 accounts, respectively, despite comparable overall size. The whole
difference between Infosys’ and Wipro’s revenues in FY09 and FY10 came from the
top-10 clients, whereas 50% of the revenue differential between TCS and Wipro
came from the top-10 clients.
Wipro’s client approach is thus far primarily hunting and not as mining-led.
Essentially, we believe its market-facing approach needs to be more intensive
and in-depth rather than expansive.
Is Wipro doing enough to work on these aspects? We believe so – the company
has changed the profile of its client engagement managers over the past 4-6
quarters, staffed its strategic accounts adequately and re-allocated personnel
where necessary. It has established/is establishing single point of
accountabilities with single P&L ownership of key accounts which facilitates
cross-selling, up-selling and mining. It is also localizing much more significantly
in tougher geographies for improved penetration.
Issue no. 3: Management of the supply-side has not been
very effective – but the company could relent on near-term
margin demands
For the year-ended FY10, Wipro’s involuntary attrition in IT-Services stood at 6.2%
(4x TCS and 2x Infosys). Also, as per our tracking, despite its size, Wipro does not
enjoy the prime slot status in several of the engineering campuses it hires from where
Cognizant, Infosys, TCS and MNCs such as Accenture/IBM also hire.
Behind the curve in keeping with wage inflation; more variability in pay can be
injected to manage attrition. We think Wipro has also been behind the curve in
giving salary hikes and when it did (as in February 2010), the average offshore payout
hike was just 8-10% (as against 14-15% by peers two months later in April
2010). To some extent, the company has corrected this with a promotion-based hike
effective July-10, which provides another 4%. However, we note that the last
offshore wage hike prior to Feb 10 happened in Aug-08 (18 months back, 8-10%
increase on that occasion as well).
In our view, too much tightening of the supply-side in favor of margins during the
downturn has resulted in subsequent, high attrition. In the current environment
which is constrained by supply and not by demand, high attrition, if unchecked,
can potentially result in lost revenues (though it has not happened in 3QFY11 as
utilization was sub-par). Some of the increase in wage could be made variable,
as TCS has effected.
Financial performance evaluation
Scenario 1: Company does not deliver growth agenda and status quo
maintained (our base case). Under this scenario, we estimate FY13 revenue growth
for the company stands between 18-20% (USD). FY13E EPS of the company is
Rs29.2. In our view, the appropriate multiple in this as-is scenario is 18.5x (15%
discount to TCS per our estimate).
Scenario 2: Company delivers on growth agenda. Under this scenario, FY13E
revenue growth for the company would be in line with peers (22% or above). FY13E
EPS of the company under this scenario would be Rs30.8. In our view, the
appropriate multiple in this as-is scenario is 19.5x (an 8% discount to TCS per our
estimate). This would push up the price target from the as-is scenario by a further
~10%.
Valuation and price target
Current valuations represent an all-time discount of 17% to Infosys (excluding the
brief period post the Lehman collapse when Infosys saw a flight-to-safety
forward/trailing P/E multiple of 18.5x – this is at a 15% discount to TCS’s target P/E
multiple of 22x. We take TCS as our benchmark multiple in the Indian IT universe.
This assumes the conservative scenario that the management does not deliver abovetrend
growth rates in FY12 which matches that of peers (TCS/Infosys).
Downward risks to our price target
Specific to Wipro, under the new management/CEO, a key downside risk is if the
growth profile for FY13 comes in lower than what the company should naturally
achieve at the minimum (18-20% USD revenue growth in FY13). The probability of
this playing out is minimal, in our view. More generally, a sharp slowdown in IT
spending environment and appreciation of the rupee against the US dollar are key
risks to our price target.
Upward risks to our price target
Specific to Wipro, under the new management/CEO, a key upside risk is if the
growth profile for FY13 exceeds 18-20% in FY13 to hit 22-23%, in line with peers.
This would result in a further 10% upside to our base case Mar-12 price target (from
Rs540 to Rs595). However, this does not represent our base case as we seek a margin
of safety. Other upside risks include faster recovery of developed economies,
particularly the US, and large deal wins, resulting in upgrades to our FY12/13
estimates.
Wipro (OW) now becomes our key pick in the sector, together with TCS (OW).
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