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Wipro
Wait and watch to continue
We met the management of Wipro. The key takeaways are i) benefits of ongoing
organisational restructuring unlikely to show in next couple of quarters; ii) with
muted organic volume visibility, higher attrition and headwinds of wage inflation,
margin performance to remain muted in near term. We reiterate Hold.
Benefits of organisational restructuring unlikely to show in near term
! While steps taken by Wipro on organisational restructuring are long term positive (though it
will reorganise Wipro's operation in line with some of the peers who have taken these steps
much earlier), we believe the challenges on near term growth continues.
! In our view, we do not rule out some changes/restructuring even in client facing staff for some
of the gamma/mega accounts to accelerate the revenue growth potential.
! We believe that out of the reorganised four momentum verticals including i) BFSI, ii) Retail
and transportation, iii) Healthcare and Life Sciences, iv) Energy, Utility, Mining and Metal;
Wipro is likely to face stiff competition from Indian peers for the first two verticals (especially
BFSI) considering their higher scale and gaining wallet share within clients. Recognising this,
Wipro is also looking to make higher investments within these verticals to drive higher
revenue growth (e.g tie up with Temenos to provide core banking solutions as services for
driving higher growth in BFSI and acquisition of SAIC's software business unit).
! In new reorganised structure, fungibility of delivery employees across verticals will not be
impacted materially considering minimal fungibility in earlier structure, while fungibility of less
experienced delivery employees will continue in the new structure as well.
! We do not expect any major surprise to guided organic dollar revenue growth of 1.5% to a
decline of 0.5% qoq within IT services for 1Q12. Even considering major organisational
restructuring and challenges discussed above, we even do not expect Wipro to surprise
positively on its organic revenue growth guidance for IT services for 2Q12.
! Overall we believe that while steps being taken are healthy, higher base and faster growth of
peers may pose bigger challenges for Wipro to drive benefits from the change faster than
expected.
Margin challenges to continue in near term
! Despite EBIT margins within IT services declining by 225bp over last four quarters, we expect
challenges on margins to continue in 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.
! 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.
! On attrition, we believe that it is likely to remain elevated versus peers in coming quarters.
Update on SAIC Software unit consolidation
! Versus our and street expectation of consolidation of SAIC's software unit by Wipro for 1-1.5
months in 1Q12, we believe it would be around 0.5 month as the consolidation process is still
underway. Wipro's management was factoring some delay and therefore it has guided only
on organic revenues within IT services for 1Q12.
! Wipro remains confident to atleast maintaining SAIC's annualised revenue run rate of
US$188mn (similar to its FY11 revenue; SAIC being January end company) from the
acquired unit with mid-single digit recurring net income margins.
! We continue to believe that this acquisition is positive, strengthening Wipro's organic scale
within Energy and Utility vertical and will drive significant business synergies going forward.
Valuation and view
! With lack of growth triggers as explained above in near term we reiterate hold. However we
will closely watch the potential benefits from the ongoing organisational restructuring for any
review in our recommendation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro
Wait and watch to continue
We met the management of Wipro. The key takeaways are i) benefits of ongoing
organisational restructuring unlikely to show in next couple of quarters; ii) with
muted organic volume visibility, higher attrition and headwinds of wage inflation,
margin performance to remain muted in near term. We reiterate Hold.
Benefits of organisational restructuring unlikely to show in near term
! While steps taken by Wipro on organisational restructuring are long term positive (though it
will reorganise Wipro's operation in line with some of the peers who have taken these steps
much earlier), we believe the challenges on near term growth continues.
! In our view, we do not rule out some changes/restructuring even in client facing staff for some
of the gamma/mega accounts to accelerate the revenue growth potential.
! We believe that out of the reorganised four momentum verticals including i) BFSI, ii) Retail
and transportation, iii) Healthcare and Life Sciences, iv) Energy, Utility, Mining and Metal;
Wipro is likely to face stiff competition from Indian peers for the first two verticals (especially
BFSI) considering their higher scale and gaining wallet share within clients. Recognising this,
Wipro is also looking to make higher investments within these verticals to drive higher
revenue growth (e.g tie up with Temenos to provide core banking solutions as services for
driving higher growth in BFSI and acquisition of SAIC's software business unit).
! In new reorganised structure, fungibility of delivery employees across verticals will not be
impacted materially considering minimal fungibility in earlier structure, while fungibility of less
experienced delivery employees will continue in the new structure as well.
! We do not expect any major surprise to guided organic dollar revenue growth of 1.5% to a
decline of 0.5% qoq within IT services for 1Q12. Even considering major organisational
restructuring and challenges discussed above, we even do not expect Wipro to surprise
positively on its organic revenue growth guidance for IT services for 2Q12.
! Overall we believe that while steps being taken are healthy, higher base and faster growth of
peers may pose bigger challenges for Wipro to drive benefits from the change faster than
expected.
Margin challenges to continue in near term
! Despite EBIT margins within IT services declining by 225bp over last four quarters, we expect
challenges on margins to continue in 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.
! 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.
! On attrition, we believe that it is likely to remain elevated versus peers in coming quarters.
Update on SAIC Software unit consolidation
! Versus our and street expectation of consolidation of SAIC's software unit by Wipro for 1-1.5
months in 1Q12, we believe it would be around 0.5 month as the consolidation process is still
underway. Wipro's management was factoring some delay and therefore it has guided only
on organic revenues within IT services for 1Q12.
! Wipro remains confident to atleast maintaining SAIC's annualised revenue run rate of
US$188mn (similar to its FY11 revenue; SAIC being January end company) from the
acquired unit with mid-single digit recurring net income margins.
! We continue to believe that this acquisition is positive, strengthening Wipro's organic scale
within Energy and Utility vertical and will drive significant business synergies going forward.
Valuation and view
! With lack of growth triggers as explained above in near term we reiterate hold. However we
will closely watch the potential benefits from the ongoing organisational restructuring for any
review in our recommendation.
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