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Wipro (WPRO)
Technology
Change is good. We hosted an investor meeting for Wipro recently. Key takeaways
include (1) new organization in which P&L responsibility of the service lines will be
eliminated and move to vertical business unit heads, (2) Wipro may require 2-3 quarters
to start growing in line with peers, and (3) company believes that it can manage the
fine balance between growth and profitability. Wipro’s valuation discount to peers has
increased and the result may present a good buying opportunity.
Strengths, weakness and mandate of new CEO
Most of the investor questions revolved around the new CEO, potential benefits from the change
and likely changes in organization structure. Wipro emphasized well-known strengths of TK Kurien,
the new CEO of IT Services, i.e. speed in decision-making, energy and entrepreneurial drive and
expert at business turnaround. Single CEO structure will lead to leaner reporting structure. Note
that the earlier joint-CEOs had 45 people reporting to them directly, something which would be
unfeasible in a single-CEO structure. Mandate of new CEO is straightforward (though a significant
challenge to achieve); grow in line or better than peers without sacrificing profitability.
New organization structure—entire P&L responsibility with vertical business unit heads
Up to now Wipro had P&L targets for verticals as well as service lines. This created conflict of
interest with service lines focused on immediate opportunities that enabled them to meet P&L
targets rather than allocate resources to open doors or create opportunities in large accounts in
which the pay-off may be back-ended. Wipro believes this structure was primarily responsible for
delay in realization of benefit from large accounts. Wipro now has moved to a structure wherein
entire P&L responsibility will rest upon vertical business unit heads. The company has aligned sales
and marketing team to respective vertical business units. Focus of service lines will shift entirely
towards technology, delivery and solutions.
Confident of closing out gap in revenue growth with peers by 2H2011E
Wipro is confident of closing out revenue growth rate gap with peers by 2H2011E. Wipro
indicated that it may take a quarter for internal reorganization and another quarter to make
significant impact on deal win rate. Right allocation of resources, nimbler organization and
focused go-to-market strategy should lead to significant improvement in deal win ratios, per
Wipro. All these initiatives would be taken without sacrificing an inch on profitability. Wipro
highlighted improvement in FX realization, productivity improvement in FPP, increase in weightage
of fresher in overall recruitment mix and price improvements as the key drivers that will enable it
to manage profitability despite the likely investments for growth.
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. Valuations at 16.7X FY2012E and 15X
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.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro (WPRO)
Technology
Change is good. We hosted an investor meeting for Wipro recently. Key takeaways
include (1) new organization in which P&L responsibility of the service lines will be
eliminated and move to vertical business unit heads, (2) Wipro may require 2-3 quarters
to start growing in line with peers, and (3) company believes that it can manage the
fine balance between growth and profitability. Wipro’s valuation discount to peers has
increased and the result may present a good buying opportunity.
Strengths, weakness and mandate of new CEO
Most of the investor questions revolved around the new CEO, potential benefits from the change
and likely changes in organization structure. Wipro emphasized well-known strengths of TK Kurien,
the new CEO of IT Services, i.e. speed in decision-making, energy and entrepreneurial drive and
expert at business turnaround. Single CEO structure will lead to leaner reporting structure. Note
that the earlier joint-CEOs had 45 people reporting to them directly, something which would be
unfeasible in a single-CEO structure. Mandate of new CEO is straightforward (though a significant
challenge to achieve); grow in line or better than peers without sacrificing profitability.
New organization structure—entire P&L responsibility with vertical business unit heads
Up to now Wipro had P&L targets for verticals as well as service lines. This created conflict of
interest with service lines focused on immediate opportunities that enabled them to meet P&L
targets rather than allocate resources to open doors or create opportunities in large accounts in
which the pay-off may be back-ended. Wipro believes this structure was primarily responsible for
delay in realization of benefit from large accounts. Wipro now has moved to a structure wherein
entire P&L responsibility will rest upon vertical business unit heads. The company has aligned sales
and marketing team to respective vertical business units. Focus of service lines will shift entirely
towards technology, delivery and solutions.
Confident of closing out gap in revenue growth with peers by 2H2011E
Wipro is confident of closing out revenue growth rate gap with peers by 2H2011E. Wipro
indicated that it may take a quarter for internal reorganization and another quarter to make
significant impact on deal win rate. Right allocation of resources, nimbler organization and
focused go-to-market strategy should lead to significant improvement in deal win ratios, per
Wipro. All these initiatives would be taken without sacrificing an inch on profitability. Wipro
highlighted improvement in FX realization, productivity improvement in FPP, increase in weightage
of fresher in overall recruitment mix and price improvements as the key drivers that will enable it
to manage profitability despite the likely investments for growth.
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. Valuations at 16.7X FY2012E and 15X
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.
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