Wipro :Muted near-term momentum; reducing estimates: Motilal Oswal

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Muted near-term momentum; reducing estimates
 The company sees lackluster momentum to continue at least till 3QFY12,
as its settles down under the new leadership and a new structure.
 We have always postulated that any turnaround at Wipro could take longer
than expected, since issue with Wipro is not just one of sub-optimal mix
but one of inferior execution as well (e.g., issues with demand estimation,
sub-optimal staffing, client mining etc.).
 We revise our estimates downwards by 5.3-5.5% for FY12/FY13.
Internal restructuring, exit of senior employees hurting growth: Wipro had formally
guided USD revenue growth of -0.4% to +1.5% for 1QFY12 in April. However, the
current expectation is for revenues to be flat to marginally negative, as its settles
under the new leadership. While internal restructuring is bound to divert management
focus, what has compounded Wipro's recent sluggishness is a significantly high
number of exits at the senior management level. While the company believes that
majority of the shakeout is now behind it, it agrees that this has had an impact on its
business, as reflected in its numbers.
Turnaround could take longer than expected: Wipro has moved out its expectation
of matching, if not bettering peer growth by one quarter to 4QFY12. We have always
believed that the turnaround could take longer than expected, given that the issue
with Wipro is not just one of sub-optimal mix but one of inferior execution as well, and
that too across most verticals ex Telecom. Wipro has had low exposure to higher
growth verticals like BFSI and high exposure to lower growth verticals like Telecom/
Tech. We do not think that Wipro's vertical mix is structurally challenged. A more
diversified exposure is beneficial to it from a long-term perspective. However, in the
context of current spends, its exposure puts it at a disadvantage.
Maintaining margins at around current levels could be challenging: Wipro's
4QFY11 IT Services EBIT margin declined by 10bp QoQ to 22.1% despite tailwinds.
Going forward, Wipro guided at margins being range-bound at current levels, with an
upward bias. This could, however, be challenging given the following: (1) If Wipro
wants to catch up with its peers in topline performance, it may have to be willing to
invest more in its sales delivery engine and/or take on more experienced staff; (2)
Wipro may have to offer more lucrative compensation to keep attrition threats at bay
given that the current wage hike comes 18-months after the last one, over which time
the peers have give two hikes.
Revising estimates downwards; maintain Neutral: Given Wipro's cautious stance
over revenue growth at least till 3QFY11, we revise our estimates downwards. We
have cut our USD revenue growth estimate to 16.7% (v/s 21.5% earlier) for FY12. Our
EPS estimates go down by 5.3-5.5%, which now stand at INR23.1 (v/s INR24.1
earlier) for FY12 and INR27.5 (v/s INR29.1 earlier) for FY13. The stock trades at
17.6x FY12E and 14.7x FY13E earnings. Maintain Neutral with a price target of
Rs468 (17x FY13E EPS of Rs27.5). Prefer Infosys.