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A long way home
Our upgrade of Wipro in February was based on 1) Higher organic
revenue growth in FY12 than in FY11 2) Flattish YY margins in FY12.
However, the soft start to FY12 puts both our assumptions at risk and we
are downgrading FY12/13 earnings by 4-6.5%. Wipro’s 1QFY12 guidance
of just (0.5)-1.5%QQ revenue growth is indicative of the adverse impact
the ongoing re-organisation has had on the company and while the street
is holding out on the hope of a big 2HFY12 revenue upswing, we are
disinclined to give Wipro excessive benefit of doubt on that front. With a
third consecutive year of growth much below peers looming large, a 15-
20% PE discount to peers is well justified. Financial performance needs to
precede valuation re-rating prospects. Downgrade to Underperform.
Revenue sluggishness is greater than expected
4.2%QQ growth in Mar-11 $-revenues to US$1,400m came in-line with street
expectations but Jun-11 guidance of (0.5)-1.5%QQ growth was way below all
fears. The ongoing management re-structuring has undoubtedly played its
part in the poor Jun-11 guidance. While Sep-Dec-Mar quarters should be
better, Wipro seems unlikely to cross the 16.5-17%YY organic revenue growth
mark in FY12. This implies, Wipro will grow just in-line with industry average
for the second consecutive year even as Tier-1 peers are growing significantly
faster. In our view, revenue growth remains a critical driver of stock
performance and more proof points are warranted from Wipro on this front.
Margin upsides remain contingent on revenue recovery
While Wipro has done a creditable job of wrapping up the re-organisation
exercise quickly, near-term margin impact remains negative. Besides the
costs of restructuring, its resultant attrition has demanded greater than peer
wage hikes impairing margins further. While improving employee mix (70% of
net additions likely to be freshers), small uptick in pricing and lower loss
making hedges are margin buffers, the lack of top-line traction precludes
near-term margin upsides. We expect 100bpsYY decline in margins in FY12.
Downgrade to Underperform
With portfolio investments in IT Services increasingly getting consolidated
towards fewer companies with every passing year, we fear that Wipro could
be the next casualty unless financial performance improves substantially.
With a 20%+ revenue growth already built into street estimates for FY13,
stock upmove demands Wipro to deliver much above that, visibility for which
is unlikely to come through in 2011. In the interim, lack of business
momentum due to the ongoing restructuring and recent history of
underperformance prevents us from taking the leap of faith on Wipro’s FY13
financial performance. We expect the stock to Underperform.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A long way home
Our upgrade of Wipro in February was based on 1) Higher organic
revenue growth in FY12 than in FY11 2) Flattish YY margins in FY12.
However, the soft start to FY12 puts both our assumptions at risk and we
are downgrading FY12/13 earnings by 4-6.5%. Wipro’s 1QFY12 guidance
of just (0.5)-1.5%QQ revenue growth is indicative of the adverse impact
the ongoing re-organisation has had on the company and while the street
is holding out on the hope of a big 2HFY12 revenue upswing, we are
disinclined to give Wipro excessive benefit of doubt on that front. With a
third consecutive year of growth much below peers looming large, a 15-
20% PE discount to peers is well justified. Financial performance needs to
precede valuation re-rating prospects. Downgrade to Underperform.
Revenue sluggishness is greater than expected
4.2%QQ growth in Mar-11 $-revenues to US$1,400m came in-line with street
expectations but Jun-11 guidance of (0.5)-1.5%QQ growth was way below all
fears. The ongoing management re-structuring has undoubtedly played its
part in the poor Jun-11 guidance. While Sep-Dec-Mar quarters should be
better, Wipro seems unlikely to cross the 16.5-17%YY organic revenue growth
mark in FY12. This implies, Wipro will grow just in-line with industry average
for the second consecutive year even as Tier-1 peers are growing significantly
faster. In our view, revenue growth remains a critical driver of stock
performance and more proof points are warranted from Wipro on this front.
Margin upsides remain contingent on revenue recovery
While Wipro has done a creditable job of wrapping up the re-organisation
exercise quickly, near-term margin impact remains negative. Besides the
costs of restructuring, its resultant attrition has demanded greater than peer
wage hikes impairing margins further. While improving employee mix (70% of
net additions likely to be freshers), small uptick in pricing and lower loss
making hedges are margin buffers, the lack of top-line traction precludes
near-term margin upsides. We expect 100bpsYY decline in margins in FY12.
Downgrade to Underperform
With portfolio investments in IT Services increasingly getting consolidated
towards fewer companies with every passing year, we fear that Wipro could
be the next casualty unless financial performance improves substantially.
With a 20%+ revenue growth already built into street estimates for FY13,
stock upmove demands Wipro to deliver much above that, visibility for which
is unlikely to come through in 2011. In the interim, lack of business
momentum due to the ongoing restructuring and recent history of
underperformance prevents us from taking the leap of faith on Wipro’s FY13
financial performance. We expect the stock to Underperform.
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