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Wipro
Needs to catch up
The gap between Wipro's revenue growth and that of its peers concerns us, as
does Wipro's declining revenue wallet share versus peers and its high margin
headwinds. We expect the gap to continue in FY11-13. We initiate coverage with a
Hold rating.
We expect Wipro’s revenue growth to continue to lag
We expect Wipro’s revenue growth (US dollar denominated) to lag its peers by as much as
8-11% in FY11 (up from 2-3% in FY10A). The gap appears to be growing as a result of
Wipro’s portfolio mix, declining market share and weaker large client mining (cross selling of
services) as compared with its peers. We expect Wipro’s revenue growth to lag its peers in
FY11 and beyond given: 1) it will take time to reap the benefits of senior management’s
reorganisation and current ongoing investment to improve revenue growth; 2) Wipro’s market
share in high-growth verticals/services is declining (this included banking, financial services
and insurance (BFSI), retail and infrastructure management services (IMS)); and 3) Wipro is
more exposed than its peers to low-growth verticals, including telecom.
Margin headwinds remain
We believe that in a rising demand scenario, Wipro’s relatively high utilisation rates and
attrition rates (Wipro’s attrition rate is the highest among its large cap peers) will lead to
muted margin performance versus its peers even beyond FY11. Management’s ongoing
investments to improve client mining and market share will also take a toll on margins.
Therefore, we believe Wipro’s EBITDA and EPS growth is likely to lag peers in FY11-13.
We initiate with a Hold rating and Rs470 target price
We believe Wipro should trade at a discount to peers, including Infosys and TCS, given its
trailing revenue and EBITDA/earnings growth (despite its lower base) versus peers going
forward. We initiate with a Hold recommendation and target price of Rs470. Our target price
is based on a FY13F PE of 17x (an 18% discount to our target multiple for Infosys and
slightly higher than the past year’s average discount) with an EPS CAGR of 14% over FY11-
13F. Our target price implies an EV/EBITDA multiple of 12x FY13F (on diluted equity) with an
EBITDA CAGR of 17% over FY11-13F.
The basics
Catalysts for share price performance
We expect the key near-term catalysts to be as follows:
CY11F IT budget finalisation, which we expect to be positive and better than in CY10, with
higher growth in outsourcing and offshoring. However, Wipro’s unfavourable portfolio mix (vs
macro opportunity) should lead to lower growth versus peers.
Cognizant’s guidance for CY11 (in February 2011) and Infosys’s guidance for FY12 in April
2011. We expect Wipro’s growth to continue lagging its peers in FY12. While building in its
typical conservatism, we expect Infosys to take a more confident stance on FY12 guidance.
Opportunity to renew large outsourcing deals worth US$174bn over the next eight quarters,
beginning from the fourth quarter of 2010. We expect Wipro to face higher competitive
challenges to win large deals.
Higher growth in discretionary spend for the industry. However, Wipro’s revenue
contributions/focus on discretionary spend is lower than its peers’.
A pick-up in demand momentum from Europe (besides continuing momentum from US)
should drive higher outsourcing from Europe, in our view. However, we believe that despite
Wipro’s strong foothold in Europe, peers including Infosys, TCS and HCL Tech are rapidly
gaining traction in Europe.
Earnings momentum
Wipro’s declining market share in high-growth verticals/services (including BFSI/Retail/IMS)
and higher exposure to low-growth verticals (including telecom) than peers are likely to pose
challenges. We expect the gap in revenue growth to continue between Wipro and its peers.
We believe that in a rising demand scenario, Wipro’s relatively high utilisation rates and
attrition rates will lead to muted margin performance versus its peers even beyond FY11.
Management’s ongoing investments to improve client mining and market share will also take a
toll on margins.
Our forecasts assume FY11-13F CAGRs of 20%, 17% and 14%, respectively, in USDdenominated
revenue (for IT services), INR-denominated EBITDA (consolidated) and INRdenominated
EPS (consolidated).
Valuation and target price
We value Wipro on a PE multiple relative to Infosys (which is an industry benchmark). We initiate
with a Hold rating with a target price of Rs470 based on an FY13F EPS of 17x, with an EPS
CAGR of c14% from FY11-13F. Our target price implies an FY13F EV/EBITDA multiple of 12x (on
diluted equity) with an EBITDA CAGR of 17% from FY11-13F.
How we differ from consensus
Our FY12F EPS is in line with the Bloomberg consensus estimate. However, our FY13F EPS is
marginally lower than consensus due to our lower margin estimates.
Risks to central scenario
Ongoing senior management reorganisation (to drive higher revenue growth) resulting in
major market share gain by Wipro versus its peers on large deals.
Any higher-than-expected revival in telecom service provider and telecom equipment verticals
benefiting Wipro more than its peers considering its higher focus on those areas.
Better-than-expected management of supply-side issues providing positive margin surprises.
Faster-than-expected revival in economic growth in Western economies, but this could benefit
both Wipro and its peers.
Depreciation of INR vs USD and appreciation of GBP/EUR/AUD vs USD, but this too would
benefit both Wipro and its peers.
Revenue growth should continue to lag
We expect Wipro’s revenue growth to continue lagging peers given Wipro’s declining
revenue wallet share, low revenue concentration on high-growth verticals such as
BFSI/retail and relatively high revenue concentration from the low-growth telecom vertical.
We believe growth in Wipro’s revenue, as denominated in USD, is likely to lag peers by as much
as 8-11% in FY11 (up from 2-3% in FY10A). The gap appears to be growing as a result of Wipro’s
portfolio mix, declining revenue wallet share and its weaker mining of large clients compared with
its peers. We expect revenue growth to lag its peers in FY11 and beyond given: 1) it will take time
to reap the benefits of senior management’s reorganisation and current investments to improve
revenue growth; 2) Wipro’s market share in high-growth verticals/services, including BFSI, retail
and infrastructure management services (IMS), is declining; and 3) Wipro is more exposed to lowgrowth
verticals, including telecoms.
Wipro’s market share at risk in traditional verticals
Wipro’s BFSI positioning versus peers slipped further recently. 1QFY10 was the first quarter
during which large-cap Indian IT companies showed signs of stabilisation or growth post FY09’s
recessionary pressure. Wipro’s peers, including Infosys and TCS, began to win market share in
BFSI. (see Table 3).
Despite Wipro’s strong focus on retail and manufacturing, its peers – including Infosys and HCL
Tech – have gained share in those markets post 1QFY10, eating into Wipro’s market share in
those verticals during the same period. Our analysis indicates that growth within BFSI and retail is
likely to increase in coming years. Given its peers’ increasing share, we believe Wipro will be
challenged to outperform in some of these verticals, (including BFSI, technology, manufacturing
and retail, and transportation/logistics). Together, these verticals contribute about 65% of Wipro’s
IT services revenues. In addition, Wipro is likely to be affected by macro challenges related to the
telecom sector, especially in the US and Europe, with Wipro’s relatively higher revenue
concentration from telecom vertical versus its peers. (Telecom and communication service
providers together contribute 16-17% of Wipro’s IT services revenues.)
Even in emerging verticals, Wipro is losing market share
Wipro’s market share in emerging verticals has declined about 300bp since 1QFY10, the first
quarter that showed signs of recessionary pressure stabilising (see Table 4). This decline came
despite Wipro’s sharper focus on emerging verticals among the top three Indian IT vendors.
Emerging verticals including Energy, utilities, media, healthcare and services together contribute
about 19% of Wipro’s IT services revenues.
Macro challenges within Telecom remain high
Considering 1) strong correlations in revenue growth of Indian IT companies with operating profits
of S&P500 companies (as shown in Chart 1 and Chart 2 within our sector arguments); and 2) our
findings related to likely higher growth in BFSI/retail/manufacturing for Indian IT (as discussed
earlier in our sector arguments), we did a second-level check to determine the lead indicators for
growth within some of the major verticals of Indian IT. We extracted the revenue/earnings growth
of top global companies in respective verticals from Bloomberg to identify some lead indicators
regarding growth opportunities for Indian IT in some of the major verticals.
Our analysis of the telecom service provider (TSP) vertical indicates that growth for top global
TSPs in CY07/CY08 was higher than for other verticals. However it is likely to be stable through
CY10-12F (a post-recessionary period) with much higher growth in other verticals including BFSI,
retail and manufacturing (our analysis was restricted to auto manufacturing). Telecom, being a
defensive vertical, is unlikely to provide any major positive or negative surprise relative to other
sectors during the periods of boom and recession. Therefore, we believe growth for each telecom
IT services vendor depends largely on its client relationship, state of maturity with its clients and
the extent of outsourcing/offshoring within clients. We believe growth opportunities in telecom are
likely to remain muted for Wipro in FY11-13 considering Wipro’s relatively high revenue
contribution from telecom and increasing competitive pressure.
However, any revival in the telecom capex cycle from CY11 onwards could result in positive
surprises for IT services vendors in the telecom vertical – clients‘ operating expenditures would
start improving, although lagging capex growth somewhat. We believe Wipro would benefit from
this scenario, considering its strong footprint. However Wipro would also face significant
competitive challenges from its peers given that their revenues in the telecom vertical is not
materially different from Wipro’s (TCS’s revenues from telecom is actually higher than Wipro’s).
Wipro needs to improve its large client mining
Wipro’s large client mining has been less effective than that of its peers and its average revenue
per active client has been lower. Despite client mining improving recently within clients with
US$10m-50m in annual revenues each, it clearly underperforms peers in mining clients with more
than US$50m in revenues (Wipro has 20 such clients on an organic basis, while peers, including
Infosys and TCS, have 25-29). We believe attracting clients with more than US$50m in annual
revenues is of utmost importance for Indian IT companies, among which Infosys leads its peers.
Wipro losing dominance in IMS
Wipro has clearly been a pioneer in IMS service offerings versus its peers. Despite the annuity
nature of this business, an increasing trend towards off-shoring and Wipro’s dominance in the
area, the company lost substantial market share to HCL Tech (Wipro lost more than 450bp market
share from 1QFY10 to 3QFY11). We do not underestimate Wipro’s capabilities here, however
both TCS and HCL Tech have improved market share, while Infosys also lost share in the same
period. In our analysis we assume no material difference among companies in terms of delivery
efforts/locations.
Wipro’s senior management changes could take time to accelerate revenue growth
The highlight of Wipro’s 3QFY11A results was the announcement of Mr TK Kurien taking over as
CEO of the IT business, which contributes more than 85% of consolidated revenues. Mr Kurien
takes over from joint CEOs Mr Suresh Vaswani and Mr Girish Paranjpe (both of whom have been
with Wipro for more than 20 years). Mr Kurien, with Wipro for over 10 years, has headed the Eco
Energy business for the past nine months, which indicates he had no major involvement in the IT
business during that time. Before Eco Energy, however, Mr Kurien was head of Telecom/Large
Deals/BPO of the Wipro IT business. Mr Kurien plans to target the growing number of
opportunities in high-growth verticals (including BFSI, healthcare, energy and utilities and retail)
by making the necessary investments and by reorganising other senior management roles to
accelerate Wipro’s revenue growth versus its peers. He is also looking to simplify the senior
management structure.
Winning large deals has become more important as the revenue base of large-cap Indian IT
companies has grown. This trend is intensifying competition among Indian IT large-cap peers.
Therefore, we believe that, despite Mr Kurien’s success in leading various IT business segments
of Wipro, it will take time for any change in growth strategies to result in meaningful market share
gain, noting that Wipro’s market share has been declining versus peers for the past several
quarters.
We believe any senior management reorganisation would create uncertainty about near-term
execution and we will monitor this aspect closely as it could also result in positive surprises.
Margin headwinds remain
We believe that Wipro faces stronger margin headwinds than its peers. We thus expect
Wipro to not only lag in revenue growth but also in earnings growth versus its peers in
coming years.
We believe that in a rising demand scenario, Wipro’s relatively high utilisation rates and attrition
rates (Wipro’s attrition rate is the highest among its large cap peers) will lead to muted margin
performance versus its peers even beyond FY11. Management’s ongoing investments to improve
client mining and market share will also take a toll on margins. Therefore, we believe Wipro’s
EBITDA and EPS growth is likely to lag peers in FY11-13.
Notably, Wipro’s 3QFY11A attrition rate of 21.6% on a last 12 months basis (LTM) for IT Services
(voluntary, excluding its BPO, Middle East and India operations) is one of the highest among
peers. After the last annual wage inflation cycle in February 2010, which covered most employees
within IT Services, Wipro’s wage inflation cycle for FY11 was due in 4QFY11. However, during the
3QFY11 results release, management announced that the seasonal wage inflation due in 4QFY11
would be considered in 1QFY12. Management has defended this postponement, citing
promotions and the additional restricted stock units (RSU) grant in 2QFY11A. However, out-ofturn
promotions in 2QFY11A covered only 18,000-20,000 employees, while additional RSUs were
granted to some mid-senior level employees (not more than 3,000) vs total employee strength of
115,900 at end-2QFY11 (within IT services), indicating most employees within IT services would
now get wage inflation after 14-15 months in 1QFY12F, despite Wipro’s higher attrition.
Considering Wipro’s lagging wage inflation cycle (covering every employee) vs peers, any
material decline in attrition rate for Wipro would be difficult in the next few quarters.
Among other factors affecting margins, such as utilisation rates, fixed price contribution etc, we
believe Wipro’s headroom is also lower than some of its peers’. Hence we expect Wipro’s margin
performance to remain relatively muted even in coming years vs peers
Valuation discount to continue
We initiate coverage of Wipro with a Hold. We prefer Infosys and TCS because we expect
Wipro’s revenues and earnings growth to continue lagging peers even beyond FY11.
We are concerned about the widening gap in revenue growth between Wipro and its peers and
the stronger margin headwinds Wipro is facing. Wipro’s declining market share in high-growth
verticals, including BFSI/retail, and relative over-exposure to the likely low-growth verticals,
including telecoms, are likely to result in its revenue growth lagging peers even beyond FY11.
Even the recent change in senior management will take time to improve Wipro’s growth profile –
indeed, a potential shake-up in senior management could create some uncertainty about nearterm
execution vs peers. Wipro’s revenue growth lag vs peers has begun inching up in recent
quarters. Wipro’s last one-year average discount (based on forward PE) of c15% to peers,
including Infosys (which is an industry benchmark), captures this increasing trailing revenue
growth. We expect Wipro’s valuation discount to continue.
Initiate with a Hold rating
We initiate with a Hold recommendation and target price of Rs470. Our target price is based on a
FY13F PE of 17x (an 18% discount to our target multiple for Infosys and slightly higher than the
past year’s average discount) with an EPS CAGR of 14% over FY11-13F (lower than our
forecasts for Infosys and TCS). We believe our target PE multiple discount vs Infosys is fair,
considering Wipro’s widening qoq gap in revenue growth vs Infosys and TCS in recent quarters,
despite its lower base. Our target price implies an EV/EBITDA multiple of 12x FY13F (on diluted
equity) with an EBITDA CAGR of 17% over FY11-13F (again much lower than our forecasts for
Infosys and TCS).
We will review our PE-based valuation discount to Infosys post any consistently improving signs
for Wipro’s growth profile.
Management team
Wipro’s Chairman Mr Azim Premji, along with his family and associate companies, owns a 79.3%
equity stake in the company. Wipro is still a family-owned company, but Mr Premji has created a
strong second-line team of professionals. At the 3QFY11A results, Wipro announced key changes
in senior management, with Mr Kurien taking over the charge as CEO of the IT business (which
contributes more than 85% of consolidated revenues) from joint CEOs Mr Vaswani and Mr
Paranjpe (more detail regarding this recent management change discussed in our company
dynamics section). Under the leadership of Mr Premji and others within senior management,
Wipro has become the third-largest listed IT company in India. Wipro’s dividend payout ratio
declined to 15-20% in FY09A and FY10A vs 25-30% in FY07A and FY08A, due to two material
acquisitions – Infocrossing in 2HCY07A and Citi Technology Services in 4QFY09A.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro
Needs to catch up
The gap between Wipro's revenue growth and that of its peers concerns us, as
does Wipro's declining revenue wallet share versus peers and its high margin
headwinds. We expect the gap to continue in FY11-13. We initiate coverage with a
Hold rating.
We expect Wipro’s revenue growth to continue to lag
We expect Wipro’s revenue growth (US dollar denominated) to lag its peers by as much as
8-11% in FY11 (up from 2-3% in FY10A). The gap appears to be growing as a result of
Wipro’s portfolio mix, declining market share and weaker large client mining (cross selling of
services) as compared with its peers. We expect Wipro’s revenue growth to lag its peers in
FY11 and beyond given: 1) it will take time to reap the benefits of senior management’s
reorganisation and current ongoing investment to improve revenue growth; 2) Wipro’s market
share in high-growth verticals/services is declining (this included banking, financial services
and insurance (BFSI), retail and infrastructure management services (IMS)); and 3) Wipro is
more exposed than its peers to low-growth verticals, including telecom.
Margin headwinds remain
We believe that in a rising demand scenario, Wipro’s relatively high utilisation rates and
attrition rates (Wipro’s attrition rate is the highest among its large cap peers) will lead to
muted margin performance versus its peers even beyond FY11. Management’s ongoing
investments to improve client mining and market share will also take a toll on margins.
Therefore, we believe Wipro’s EBITDA and EPS growth is likely to lag peers in FY11-13.
We initiate with a Hold rating and Rs470 target price
We believe Wipro should trade at a discount to peers, including Infosys and TCS, given its
trailing revenue and EBITDA/earnings growth (despite its lower base) versus peers going
forward. We initiate with a Hold recommendation and target price of Rs470. Our target price
is based on a FY13F PE of 17x (an 18% discount to our target multiple for Infosys and
slightly higher than the past year’s average discount) with an EPS CAGR of 14% over FY11-
13F. Our target price implies an EV/EBITDA multiple of 12x FY13F (on diluted equity) with an
EBITDA CAGR of 17% over FY11-13F.
The basics
Catalysts for share price performance
We expect the key near-term catalysts to be as follows:
CY11F IT budget finalisation, which we expect to be positive and better than in CY10, with
higher growth in outsourcing and offshoring. However, Wipro’s unfavourable portfolio mix (vs
macro opportunity) should lead to lower growth versus peers.
Cognizant’s guidance for CY11 (in February 2011) and Infosys’s guidance for FY12 in April
2011. We expect Wipro’s growth to continue lagging its peers in FY12. While building in its
typical conservatism, we expect Infosys to take a more confident stance on FY12 guidance.
Opportunity to renew large outsourcing deals worth US$174bn over the next eight quarters,
beginning from the fourth quarter of 2010. We expect Wipro to face higher competitive
challenges to win large deals.
Higher growth in discretionary spend for the industry. However, Wipro’s revenue
contributions/focus on discretionary spend is lower than its peers’.
A pick-up in demand momentum from Europe (besides continuing momentum from US)
should drive higher outsourcing from Europe, in our view. However, we believe that despite
Wipro’s strong foothold in Europe, peers including Infosys, TCS and HCL Tech are rapidly
gaining traction in Europe.
Earnings momentum
Wipro’s declining market share in high-growth verticals/services (including BFSI/Retail/IMS)
and higher exposure to low-growth verticals (including telecom) than peers are likely to pose
challenges. We expect the gap in revenue growth to continue between Wipro and its peers.
We believe that in a rising demand scenario, Wipro’s relatively high utilisation rates and
attrition rates will lead to muted margin performance versus its peers even beyond FY11.
Management’s ongoing investments to improve client mining and market share will also take a
toll on margins.
Our forecasts assume FY11-13F CAGRs of 20%, 17% and 14%, respectively, in USDdenominated
revenue (for IT services), INR-denominated EBITDA (consolidated) and INRdenominated
EPS (consolidated).
Valuation and target price
We value Wipro on a PE multiple relative to Infosys (which is an industry benchmark). We initiate
with a Hold rating with a target price of Rs470 based on an FY13F EPS of 17x, with an EPS
CAGR of c14% from FY11-13F. Our target price implies an FY13F EV/EBITDA multiple of 12x (on
diluted equity) with an EBITDA CAGR of 17% from FY11-13F.
How we differ from consensus
Our FY12F EPS is in line with the Bloomberg consensus estimate. However, our FY13F EPS is
marginally lower than consensus due to our lower margin estimates.
Risks to central scenario
Ongoing senior management reorganisation (to drive higher revenue growth) resulting in
major market share gain by Wipro versus its peers on large deals.
Any higher-than-expected revival in telecom service provider and telecom equipment verticals
benefiting Wipro more than its peers considering its higher focus on those areas.
Better-than-expected management of supply-side issues providing positive margin surprises.
Faster-than-expected revival in economic growth in Western economies, but this could benefit
both Wipro and its peers.
Depreciation of INR vs USD and appreciation of GBP/EUR/AUD vs USD, but this too would
benefit both Wipro and its peers.
Revenue growth should continue to lag
We expect Wipro’s revenue growth to continue lagging peers given Wipro’s declining
revenue wallet share, low revenue concentration on high-growth verticals such as
BFSI/retail and relatively high revenue concentration from the low-growth telecom vertical.
We believe growth in Wipro’s revenue, as denominated in USD, is likely to lag peers by as much
as 8-11% in FY11 (up from 2-3% in FY10A). The gap appears to be growing as a result of Wipro’s
portfolio mix, declining revenue wallet share and its weaker mining of large clients compared with
its peers. We expect revenue growth to lag its peers in FY11 and beyond given: 1) it will take time
to reap the benefits of senior management’s reorganisation and current investments to improve
revenue growth; 2) Wipro’s market share in high-growth verticals/services, including BFSI, retail
and infrastructure management services (IMS), is declining; and 3) Wipro is more exposed to lowgrowth
verticals, including telecoms.
Wipro’s market share at risk in traditional verticals
Wipro’s BFSI positioning versus peers slipped further recently. 1QFY10 was the first quarter
during which large-cap Indian IT companies showed signs of stabilisation or growth post FY09’s
recessionary pressure. Wipro’s peers, including Infosys and TCS, began to win market share in
BFSI. (see Table 3).
Despite Wipro’s strong focus on retail and manufacturing, its peers – including Infosys and HCL
Tech – have gained share in those markets post 1QFY10, eating into Wipro’s market share in
those verticals during the same period. Our analysis indicates that growth within BFSI and retail is
likely to increase in coming years. Given its peers’ increasing share, we believe Wipro will be
challenged to outperform in some of these verticals, (including BFSI, technology, manufacturing
and retail, and transportation/logistics). Together, these verticals contribute about 65% of Wipro’s
IT services revenues. In addition, Wipro is likely to be affected by macro challenges related to the
telecom sector, especially in the US and Europe, with Wipro’s relatively higher revenue
concentration from telecom vertical versus its peers. (Telecom and communication service
providers together contribute 16-17% of Wipro’s IT services revenues.)
Even in emerging verticals, Wipro is losing market share
Wipro’s market share in emerging verticals has declined about 300bp since 1QFY10, the first
quarter that showed signs of recessionary pressure stabilising (see Table 4). This decline came
despite Wipro’s sharper focus on emerging verticals among the top three Indian IT vendors.
Emerging verticals including Energy, utilities, media, healthcare and services together contribute
about 19% of Wipro’s IT services revenues.
Macro challenges within Telecom remain high
Considering 1) strong correlations in revenue growth of Indian IT companies with operating profits
of S&P500 companies (as shown in Chart 1 and Chart 2 within our sector arguments); and 2) our
findings related to likely higher growth in BFSI/retail/manufacturing for Indian IT (as discussed
earlier in our sector arguments), we did a second-level check to determine the lead indicators for
growth within some of the major verticals of Indian IT. We extracted the revenue/earnings growth
of top global companies in respective verticals from Bloomberg to identify some lead indicators
regarding growth opportunities for Indian IT in some of the major verticals.
Our analysis of the telecom service provider (TSP) vertical indicates that growth for top global
TSPs in CY07/CY08 was higher than for other verticals. However it is likely to be stable through
CY10-12F (a post-recessionary period) with much higher growth in other verticals including BFSI,
retail and manufacturing (our analysis was restricted to auto manufacturing). Telecom, being a
defensive vertical, is unlikely to provide any major positive or negative surprise relative to other
sectors during the periods of boom and recession. Therefore, we believe growth for each telecom
IT services vendor depends largely on its client relationship, state of maturity with its clients and
the extent of outsourcing/offshoring within clients. We believe growth opportunities in telecom are
likely to remain muted for Wipro in FY11-13 considering Wipro’s relatively high revenue
contribution from telecom and increasing competitive pressure.
However, any revival in the telecom capex cycle from CY11 onwards could result in positive
surprises for IT services vendors in the telecom vertical – clients‘ operating expenditures would
start improving, although lagging capex growth somewhat. We believe Wipro would benefit from
this scenario, considering its strong footprint. However Wipro would also face significant
competitive challenges from its peers given that their revenues in the telecom vertical is not
materially different from Wipro’s (TCS’s revenues from telecom is actually higher than Wipro’s).
Wipro needs to improve its large client mining
Wipro’s large client mining has been less effective than that of its peers and its average revenue
per active client has been lower. Despite client mining improving recently within clients with
US$10m-50m in annual revenues each, it clearly underperforms peers in mining clients with more
than US$50m in revenues (Wipro has 20 such clients on an organic basis, while peers, including
Infosys and TCS, have 25-29). We believe attracting clients with more than US$50m in annual
revenues is of utmost importance for Indian IT companies, among which Infosys leads its peers.
Wipro losing dominance in IMS
Wipro has clearly been a pioneer in IMS service offerings versus its peers. Despite the annuity
nature of this business, an increasing trend towards off-shoring and Wipro’s dominance in the
area, the company lost substantial market share to HCL Tech (Wipro lost more than 450bp market
share from 1QFY10 to 3QFY11). We do not underestimate Wipro’s capabilities here, however
both TCS and HCL Tech have improved market share, while Infosys also lost share in the same
period. In our analysis we assume no material difference among companies in terms of delivery
efforts/locations.
Wipro’s senior management changes could take time to accelerate revenue growth
The highlight of Wipro’s 3QFY11A results was the announcement of Mr TK Kurien taking over as
CEO of the IT business, which contributes more than 85% of consolidated revenues. Mr Kurien
takes over from joint CEOs Mr Suresh Vaswani and Mr Girish Paranjpe (both of whom have been
with Wipro for more than 20 years). Mr Kurien, with Wipro for over 10 years, has headed the Eco
Energy business for the past nine months, which indicates he had no major involvement in the IT
business during that time. Before Eco Energy, however, Mr Kurien was head of Telecom/Large
Deals/BPO of the Wipro IT business. Mr Kurien plans to target the growing number of
opportunities in high-growth verticals (including BFSI, healthcare, energy and utilities and retail)
by making the necessary investments and by reorganising other senior management roles to
accelerate Wipro’s revenue growth versus its peers. He is also looking to simplify the senior
management structure.
Winning large deals has become more important as the revenue base of large-cap Indian IT
companies has grown. This trend is intensifying competition among Indian IT large-cap peers.
Therefore, we believe that, despite Mr Kurien’s success in leading various IT business segments
of Wipro, it will take time for any change in growth strategies to result in meaningful market share
gain, noting that Wipro’s market share has been declining versus peers for the past several
quarters.
We believe any senior management reorganisation would create uncertainty about near-term
execution and we will monitor this aspect closely as it could also result in positive surprises.
Margin headwinds remain
We believe that Wipro faces stronger margin headwinds than its peers. We thus expect
Wipro to not only lag in revenue growth but also in earnings growth versus its peers in
coming years.
We believe that in a rising demand scenario, Wipro’s relatively high utilisation rates and attrition
rates (Wipro’s attrition rate is the highest among its large cap peers) will lead to muted margin
performance versus its peers even beyond FY11. Management’s ongoing investments to improve
client mining and market share will also take a toll on margins. Therefore, we believe Wipro’s
EBITDA and EPS growth is likely to lag peers in FY11-13.
Notably, Wipro’s 3QFY11A attrition rate of 21.6% on a last 12 months basis (LTM) for IT Services
(voluntary, excluding its BPO, Middle East and India operations) is one of the highest among
peers. After the last annual wage inflation cycle in February 2010, which covered most employees
within IT Services, Wipro’s wage inflation cycle for FY11 was due in 4QFY11. However, during the
3QFY11 results release, management announced that the seasonal wage inflation due in 4QFY11
would be considered in 1QFY12. Management has defended this postponement, citing
promotions and the additional restricted stock units (RSU) grant in 2QFY11A. However, out-ofturn
promotions in 2QFY11A covered only 18,000-20,000 employees, while additional RSUs were
granted to some mid-senior level employees (not more than 3,000) vs total employee strength of
115,900 at end-2QFY11 (within IT services), indicating most employees within IT services would
now get wage inflation after 14-15 months in 1QFY12F, despite Wipro’s higher attrition.
Considering Wipro’s lagging wage inflation cycle (covering every employee) vs peers, any
material decline in attrition rate for Wipro would be difficult in the next few quarters.
Among other factors affecting margins, such as utilisation rates, fixed price contribution etc, we
believe Wipro’s headroom is also lower than some of its peers’. Hence we expect Wipro’s margin
performance to remain relatively muted even in coming years vs peers
Valuation discount to continue
We initiate coverage of Wipro with a Hold. We prefer Infosys and TCS because we expect
Wipro’s revenues and earnings growth to continue lagging peers even beyond FY11.
We are concerned about the widening gap in revenue growth between Wipro and its peers and
the stronger margin headwinds Wipro is facing. Wipro’s declining market share in high-growth
verticals, including BFSI/retail, and relative over-exposure to the likely low-growth verticals,
including telecoms, are likely to result in its revenue growth lagging peers even beyond FY11.
Even the recent change in senior management will take time to improve Wipro’s growth profile –
indeed, a potential shake-up in senior management could create some uncertainty about nearterm
execution vs peers. Wipro’s revenue growth lag vs peers has begun inching up in recent
quarters. Wipro’s last one-year average discount (based on forward PE) of c15% to peers,
including Infosys (which is an industry benchmark), captures this increasing trailing revenue
growth. We expect Wipro’s valuation discount to continue.
Initiate with a Hold rating
We initiate with a Hold recommendation and target price of Rs470. Our target price is based on a
FY13F PE of 17x (an 18% discount to our target multiple for Infosys and slightly higher than the
past year’s average discount) with an EPS CAGR of 14% over FY11-13F (lower than our
forecasts for Infosys and TCS). We believe our target PE multiple discount vs Infosys is fair,
considering Wipro’s widening qoq gap in revenue growth vs Infosys and TCS in recent quarters,
despite its lower base. Our target price implies an EV/EBITDA multiple of 12x FY13F (on diluted
equity) with an EBITDA CAGR of 17% over FY11-13F (again much lower than our forecasts for
Infosys and TCS).
We will review our PE-based valuation discount to Infosys post any consistently improving signs
for Wipro’s growth profile.
Management team
Wipro’s Chairman Mr Azim Premji, along with his family and associate companies, owns a 79.3%
equity stake in the company. Wipro is still a family-owned company, but Mr Premji has created a
strong second-line team of professionals. At the 3QFY11A results, Wipro announced key changes
in senior management, with Mr Kurien taking over the charge as CEO of the IT business (which
contributes more than 85% of consolidated revenues) from joint CEOs Mr Vaswani and Mr
Paranjpe (more detail regarding this recent management change discussed in our company
dynamics section). Under the leadership of Mr Premji and others within senior management,
Wipro has become the third-largest listed IT company in India. Wipro’s dividend payout ratio
declined to 15-20% in FY09A and FY10A vs 25-30% in FY07A and FY08A, due to two material
acquisitions – Infocrossing in 2HCY07A and Citi Technology Services in 4QFY09A.
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