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Wipro Ltd.
Management meeting takeaways: Expect a slow and steady turnaround
Quick Comment: We have been positive on the new
management at Wipro and believe that it is making the
right changes to win back investor interest. However,
after the reorganization last month, we believe that to
improve its revenue growth trajectory, Wipro next needs
to strengthen its sales efforts in key geographies.
Restructuring may have associated costs in the
near term: We estimate that costs associated with
Wipro’s recent restructuring could have 80-100bps
impact on margins in the next 1-2 quarters. We believe
improvement in revenue growth trajectory could take
longer and should be visible over the medium term (next
3-4 quarters).
Uncertainty in the Middle East has not been a major
disruption so far: Overall, India and Middle East
operations are ~9% of its total revenues and we believe
contribution from the Mideast could be in the low-mid
single digits. Wipro has moved employees from
countries like Qatar, Bahrain, and Dubai to alternate
locations in the wake of unrest in the region and has so
far avoided any work-related disruption. It has around
100 people in a delivery center in Egypt. Work in Saudi
Arabia is largely around Healthcare and Oil and Gas
verticals.
FY12 revenue growth expectations for Wipro are
lower than peers: However, with the stock trading at a
30% premium to the broader market, further upside
would be driven by the extent of revenue
outperformance, in our view. We believe Wipro still has
some work to do on strengthening its sales efforts and
we do not see any material upgrades to revenue growth
in the near term. Since we expect revenue upside to
manifest itself with a lag compared to the restructuring
costs that would be more upfront in nature, we think the
near-term upside for the stock could be capped.
Since Mr. Kurien has taken over as Wipro’s CEO, he has
announced an internal restructuring for the organization. We
understand that the first phase of the changes has been
around vertical, service and geo lines. We expect management
to focus now on strengthening its sales efforts, which would
finally help revenue ramp-up with clients.
Vertical heads to take responsibility for clients: Wipro has
reworked its client engagement strategy. Earlier the company
had vertical, service line and geography structure within clients
– with each of the above having P&L responsibilities. This led
to multiple touch points within an account for Wipro clients.
Management thinks that the structure led to confusion and
duplication for client-facing teams.
What’s changed under the new structure? Verticals will take
over the client responsibilities and service/geography lines will
no longer have client or P&L responsibility. Geography teams
have also been dismantled and will now be combined with the
vertical teams. All operating teams (projects, Centres Of
Excellence) would still have gross margin targets to ensure
efficiency in the system.
Financials and Valuation: We expect a 22% revenue CAGR
for Wipro’s IT services business over F2011-13 in USD terms,
below that of Infosys and TCS. Overall, for the company, we
expect revenue and earnings CAGR of 21% and 13%,
respectively, over F2011-13.
Wipro is trading at 19x F2012e and 16x F2013e EPS. Its
discounts to Infosys are 11% and 5%; its discounts to TCS are
17% and 13%. Though these discounts are tempting and
should revert to the mean over time, in the absence of any
material pickup in revenue growth, we think Wipro could
continue to trade at a discount to its larger peers. We note that
the stock also trades at a 30% premium to the Sensex.
Consequently, in the near term, given the market volatility – we
think it prudent to be opportunistic in accumulating the stock.
Outlook for Mar-11 quarter: Wipro management indicated
that pricing increases are coming through; there have been
quite a few instances of price increases with clients. The
discretionary spending with clients in key verticals continues to
improve, according to Wipro. Management believes that
differential growth across geographies and verticals is likely to
continue over the coming quarters. It believes that attrition is
likely to trend down over the coming quarters. Wipro has
guided for revenues of US$1,384-1,411mn (+3-5% QoQ). We
expect it to deliver in line with its guidance and closer to the top
end. We expect Wipro to deliver revenues of US$1,411m in
4Q.
Price Target
Our price target for the stock is Rs480. We use discounted
cash flow model and take a probability-weighted average of our
scenario values. Key assumptions in our DCF include a cost of
equity of 13.3% and a terminal FCF growth rate of 4%. Other
important assumptions are as follows:
• Bull case value of Rs580 – weighting 40%: Revenue
and EBIT CAGRs of 23.7% and 22.7% for F2011-21;
gradual decline in margins to 17% by F2021e.
• Base case value of Rs 440 – weighting 50%: Revenue
and EBIT CAGRs of 20% and 19% for F2011-21; rising
costs cause decline in margins to 15% by F2021e.
• Bear case value of Rs280 – weighting 10%: Revenue
and EBIT CAGRs of 15.7% and 13.4% for F2011-21;
larger decline in margins to ~17% by F2021e.
Our price target now implies 20x FY12e EPS and 17x FY13e
EPS.
Key Risks
Downside risks include:
1) Significant slowdown in technology spending by US
clients;
2) Challenges for its BPO business, owing to high employee
attrition;
3) Integration issues or costs stemming from several small
acquisitions Wipro has made in the past.
Upside risks include:
1) Any large deals;
2) better profitability of organic business and acquisitions;
and
3) rupee depreciation to benefit margins
Company Description
Wipro Ltd provides high-end R&D services along with
application development and maintenance services to corporate
giants and global technology organizations. The company also
manages IT infrastructure for both types of customers globally.
Wipro's solutions cover a wide range of business areas including
hardware design, system software and embedded software,
telecom software, e-commerce consulting, web enabling and
customer management.
India Software
Industry View: In-Line
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro Ltd.
Management meeting takeaways: Expect a slow and steady turnaround
Quick Comment: We have been positive on the new
management at Wipro and believe that it is making the
right changes to win back investor interest. However,
after the reorganization last month, we believe that to
improve its revenue growth trajectory, Wipro next needs
to strengthen its sales efforts in key geographies.
Restructuring may have associated costs in the
near term: We estimate that costs associated with
Wipro’s recent restructuring could have 80-100bps
impact on margins in the next 1-2 quarters. We believe
improvement in revenue growth trajectory could take
longer and should be visible over the medium term (next
3-4 quarters).
Uncertainty in the Middle East has not been a major
disruption so far: Overall, India and Middle East
operations are ~9% of its total revenues and we believe
contribution from the Mideast could be in the low-mid
single digits. Wipro has moved employees from
countries like Qatar, Bahrain, and Dubai to alternate
locations in the wake of unrest in the region and has so
far avoided any work-related disruption. It has around
100 people in a delivery center in Egypt. Work in Saudi
Arabia is largely around Healthcare and Oil and Gas
verticals.
FY12 revenue growth expectations for Wipro are
lower than peers: However, with the stock trading at a
30% premium to the broader market, further upside
would be driven by the extent of revenue
outperformance, in our view. We believe Wipro still has
some work to do on strengthening its sales efforts and
we do not see any material upgrades to revenue growth
in the near term. Since we expect revenue upside to
manifest itself with a lag compared to the restructuring
costs that would be more upfront in nature, we think the
near-term upside for the stock could be capped.
Since Mr. Kurien has taken over as Wipro’s CEO, he has
announced an internal restructuring for the organization. We
understand that the first phase of the changes has been
around vertical, service and geo lines. We expect management
to focus now on strengthening its sales efforts, which would
finally help revenue ramp-up with clients.
Vertical heads to take responsibility for clients: Wipro has
reworked its client engagement strategy. Earlier the company
had vertical, service line and geography structure within clients
– with each of the above having P&L responsibilities. This led
to multiple touch points within an account for Wipro clients.
Management thinks that the structure led to confusion and
duplication for client-facing teams.
What’s changed under the new structure? Verticals will take
over the client responsibilities and service/geography lines will
no longer have client or P&L responsibility. Geography teams
have also been dismantled and will now be combined with the
vertical teams. All operating teams (projects, Centres Of
Excellence) would still have gross margin targets to ensure
efficiency in the system.
Financials and Valuation: We expect a 22% revenue CAGR
for Wipro’s IT services business over F2011-13 in USD terms,
below that of Infosys and TCS. Overall, for the company, we
expect revenue and earnings CAGR of 21% and 13%,
respectively, over F2011-13.
Wipro is trading at 19x F2012e and 16x F2013e EPS. Its
discounts to Infosys are 11% and 5%; its discounts to TCS are
17% and 13%. Though these discounts are tempting and
should revert to the mean over time, in the absence of any
material pickup in revenue growth, we think Wipro could
continue to trade at a discount to its larger peers. We note that
the stock also trades at a 30% premium to the Sensex.
Consequently, in the near term, given the market volatility – we
think it prudent to be opportunistic in accumulating the stock.
Outlook for Mar-11 quarter: Wipro management indicated
that pricing increases are coming through; there have been
quite a few instances of price increases with clients. The
discretionary spending with clients in key verticals continues to
improve, according to Wipro. Management believes that
differential growth across geographies and verticals is likely to
continue over the coming quarters. It believes that attrition is
likely to trend down over the coming quarters. Wipro has
guided for revenues of US$1,384-1,411mn (+3-5% QoQ). We
expect it to deliver in line with its guidance and closer to the top
end. We expect Wipro to deliver revenues of US$1,411m in
4Q.
Price Target
Our price target for the stock is Rs480. We use discounted
cash flow model and take a probability-weighted average of our
scenario values. Key assumptions in our DCF include a cost of
equity of 13.3% and a terminal FCF growth rate of 4%. Other
important assumptions are as follows:
• Bull case value of Rs580 – weighting 40%: Revenue
and EBIT CAGRs of 23.7% and 22.7% for F2011-21;
gradual decline in margins to 17% by F2021e.
• Base case value of Rs 440 – weighting 50%: Revenue
and EBIT CAGRs of 20% and 19% for F2011-21; rising
costs cause decline in margins to 15% by F2021e.
• Bear case value of Rs280 – weighting 10%: Revenue
and EBIT CAGRs of 15.7% and 13.4% for F2011-21;
larger decline in margins to ~17% by F2021e.
Our price target now implies 20x FY12e EPS and 17x FY13e
EPS.
Key Risks
Downside risks include:
1) Significant slowdown in technology spending by US
clients;
2) Challenges for its BPO business, owing to high employee
attrition;
3) Integration issues or costs stemming from several small
acquisitions Wipro has made in the past.
Upside risks include:
1) Any large deals;
2) better profitability of organic business and acquisitions;
and
3) rupee depreciation to benefit margins
Company Description
Wipro Ltd provides high-end R&D services along with
application development and maintenance services to corporate
giants and global technology organizations. The company also
manages IT infrastructure for both types of customers globally.
Wipro's solutions cover a wide range of business areas including
hardware design, system software and embedded software,
telecom software, e-commerce consulting, web enabling and
customer management.
India Software
Industry View: In-Line
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