Wipro 1HFY12: Tough setting:: Macquarie Research

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Wipro
1HFY12: Tough setting
Event
 Wipro reported in-line 4QFY11 results and guided the Street for back-ended
growth in FY12. We believe markets would like to have more confidence on
the growth trajectory for the company before turning constructive.
 Wipro had announced a major organisational rehaul last quarter. While we
view the efforts towards organisational change as positive, 1H FY12 stock
performance might be in flux until we see clear delivery on revenue and
profitable growth.

Impact
 Growth: Key word for Wipro top brass. On its earnings conference call
management listed various areas for helping the company regain lost ground
vs. peers: 1) Focus on Analytics, Mobility and Cloud solutions; 2) Visible signs
of increased discretionary spend from clients; 3) Momentum in BFSI, Energy &
Utilities verticals; 4) Deeper client mining with full service offerings; and 5) Move
to single P&L for verticals. Given our bullish demand view, we remain optimistic
that these factors will help the company’s performance. Even so, 1Q guidance
given today has led us to nudge our FY12 revenue forecast down.
 Trimming our FY12 growth. We were building in 23% YoY revenue growth
for Wipro. Post muted 1.5% QoQ growth guidance for 1Q, we have scaled
back our estimate to 19% (vs. NASSCOM growth forecast of 16-18%). Wipro
would need to see a CQGR of 5.5% for the last three quarters in FY12 to hit
our estimate.
 Margin performance tied to growth. 4Q margins of 22.1% were in line with
our assumption. Even so, we have scaled back our EBIT margin forecast for
FY12 by 50bps to account for lower growth. Top management’s pursuit of
growth would keep a check on margins, in our view.
 4Q results. Wipro delivered 4Q IT services revenues of US$1,400m (up 4%
QoQ), in line with our estimate. EBIT margin was flat at 22.1% (vs our estimate
of 22.2%). On a consolidated level, revenues were Rs82.7bn (up 6% QoQ),
EBIT was Rs14.8bn (Up 3% QoQ) and EPS was Rs5.60 (vs Rs5.39 in 3Q).
Earnings and target price revision
 Reduced revenue growth is offset by lower tax assumption for Wipro –
resulting in less than 1% change in our 2012-13E EPS estimates. No change
in our TP.
Price catalyst
 12-month price target: Rs540.00 based on a PER methodology.
 Catalyst: Pick-up in volume growth and large deal wins.
Action and recommendation
 OP maintained. 4Q results from IT majors have indicated mixed demand
environment for FY12. We stick to our bullish call on demand and expect
Wipro to be a beneficiary.