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We hosted Wipro at RBS China-India access meet in London. Key highlights are i) ongoing
management reorganization will affect organic growth in near term, but is positive over mediumlong
term ii) unlike peers who are witnessing all-round growth, Wipro sees muted visibility in
Manufacturing and Telecom.
Management reorganization to impact near term growth
From Wipro, Mr. Jatin Dalal (Head of Finance for UK and EMEA and Head of Finance for
verticals/services including Manufacturing, Energy & Utility and Product Engineering)
participated in our conference. Please note Mr. Jatin Dalal was recently promoted to replace
Mr. Manish Dugar as CFO of the IT services. Mr. Manish Dugar will now be heading BPO
business.
With likely restructuring within client engagement management for some of the key clients,
revival in revenue growth is not expected sooner. The management believes material
impact/benefits of restructuring will likely be witnessed largely in 4Q12. Therefore, we expect
muted organic dollar revenue growth guidance even for 2Q12. We do not expect any major
surprise to guided organic dollar revenue growth of 1.5% qoq to a decline of 0.5% qoq within
IT services for 1Q12.
However, Wipro strongly believes that single focus of verticalised selling (versus earlier
structure of independent account mining by vertical and various horizontal heads separately)
will drive higher revenues within existing clients going forward. We believe that ongoing
restructuring efforts will be positive over the long term and align Wipro's operations similar to
some if its peers that undertook such reorganization earlier.
In terms of verticals, Wipro witnesses higher demand traction within BFSI, Energy & Utility,
Healthcare and Retail segments. It continues to expect muted revenue visibility within
Telecom (both for service provider and OEM segments) and Manufacturing, together
contributing around one third of IT services revenues. Within manufacturing, Wipro witnesses
some impact of Japan earthquake on supply chain management of some its clients. However,
our interactions with peers indicate improving demand visibility within Telecom and
Manufacturing.
Within services, Wipro is witnessing higher demand for smart grid, security services, digital
services especially within Energy and Utility vertical. In particular, the company is facing tight
supply of engineers amid increasing demand for some of these services. We believe that
Wipro's buy out of SAIC's software unit is a step in a right direction to further strengthen its
capabilities within Energy and Utility vertical versus Indian peers.
Margin challenges to continue in near term
The management remains positive of managing margins within a narrow band over medium
to long term. However, it clearly believes that volume growth would the biggest margin lever
going forward offsetting margin pressure due to wage inflation and high attrition over next
couple of quarters.
Despite a 225bp decline in EBIT margins within IT services over last four quarters, we expect
margin challenges to continue in the near term considering high attrition, wage hikes (12-15%
for offshore employees and 2-4% for onsite employee effective June 2011) and lack of
organic growth triggers. In particular, we believe that attrition is likely to remain higher
compared to its peers in coming quarters.
However, with expiry of legacy cash flow hedges by 4Q12, we expect realised INR/USD rate
to improve over medium term assuming no major changes in spot rates.
Valuation and view
Given the lack of growth triggers in the near term as explained above, we reiterate Hold rating
for Wipro. However, we will closely watch the potential benefits from the ongoing
organizational restructuring for any review of our recommendation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We hosted Wipro at RBS China-India access meet in London. Key highlights are i) ongoing
management reorganization will affect organic growth in near term, but is positive over mediumlong
term ii) unlike peers who are witnessing all-round growth, Wipro sees muted visibility in
Manufacturing and Telecom.
Management reorganization to impact near term growth
From Wipro, Mr. Jatin Dalal (Head of Finance for UK and EMEA and Head of Finance for
verticals/services including Manufacturing, Energy & Utility and Product Engineering)
participated in our conference. Please note Mr. Jatin Dalal was recently promoted to replace
Mr. Manish Dugar as CFO of the IT services. Mr. Manish Dugar will now be heading BPO
business.
With likely restructuring within client engagement management for some of the key clients,
revival in revenue growth is not expected sooner. The management believes material
impact/benefits of restructuring will likely be witnessed largely in 4Q12. Therefore, we expect
muted organic dollar revenue growth guidance even for 2Q12. We do not expect any major
surprise to guided organic dollar revenue growth of 1.5% qoq to a decline of 0.5% qoq within
IT services for 1Q12.
However, Wipro strongly believes that single focus of verticalised selling (versus earlier
structure of independent account mining by vertical and various horizontal heads separately)
will drive higher revenues within existing clients going forward. We believe that ongoing
restructuring efforts will be positive over the long term and align Wipro's operations similar to
some if its peers that undertook such reorganization earlier.
In terms of verticals, Wipro witnesses higher demand traction within BFSI, Energy & Utility,
Healthcare and Retail segments. It continues to expect muted revenue visibility within
Telecom (both for service provider and OEM segments) and Manufacturing, together
contributing around one third of IT services revenues. Within manufacturing, Wipro witnesses
some impact of Japan earthquake on supply chain management of some its clients. However,
our interactions with peers indicate improving demand visibility within Telecom and
Manufacturing.
Within services, Wipro is witnessing higher demand for smart grid, security services, digital
services especially within Energy and Utility vertical. In particular, the company is facing tight
supply of engineers amid increasing demand for some of these services. We believe that
Wipro's buy out of SAIC's software unit is a step in a right direction to further strengthen its
capabilities within Energy and Utility vertical versus Indian peers.
Margin challenges to continue in near term
The management remains positive of managing margins within a narrow band over medium
to long term. However, it clearly believes that volume growth would the biggest margin lever
going forward offsetting margin pressure due to wage inflation and high attrition over next
couple of quarters.
Despite a 225bp decline in EBIT margins within IT services over last four quarters, we expect
margin challenges to continue in the near term considering high attrition, wage hikes (12-15%
for offshore employees and 2-4% for onsite employee effective June 2011) and lack of
organic growth triggers. In particular, we believe that attrition is likely to remain higher
compared to its peers in coming quarters.
However, with expiry of legacy cash flow hedges by 4Q12, we expect realised INR/USD rate
to improve over medium term assuming no major changes in spot rates.
Valuation and view
Given the lack of growth triggers in the near term as explained above, we reiterate Hold rating
for Wipro. However, we will closely watch the potential benefits from the ongoing
organizational restructuring for any review of our recommendation.
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