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Wipro Ltd.
Muted 2Q guidance
What's Changed
FY12e/FY13e EPS Down by 3.8%/4.7%
Quick Comment: Wipro’s mid-teens revenue growth
should significantly lag its larger peers in FY12e, in our
view. Management expects Wipro to resume
industry-leading revenue growth rates from the Dec-11
or Mar-12 quarter onwards. While we await a turnaround
at Wipro after the recent management changes, we
maintain our Equal-weight rating on the stock.
Mixed Jun-11 results: IT services revenues of
US$1,408m (+0.5% qoq, +17% yoy) were below our
estimates; Q2 organic guidance is for flat qoq revenues,
in our view. FX gains helped reported consolidated
revenues and net income. Overall margins of 16.8%
(-74bps qoq, -275bps yoy) were lower than our
estimates due to higher losses in its “Other” business
segment. Net income of Rs13.3bn (-3% qoq, +1.2%
yoy) was higher than our estimates due to significantly
higher than expected FX gains during the quarter.
Financials: We now expect Wipro to achieve
US$ revenue growth of 16% yoy in IT services in FY12e,
including the SAIC acquisition. The organic revenue
growth would be ~13% yoy, in our view. Overall we
expect revenue growth of 18% yoy, EBIT margins of
17.7% (-70bps yoy) and net income growth of 8.5% yoy
in FY12e. We expect revenue and net income CAGRs of
19% and 11% respectively.
Valuations: Wipro is currently trading at 17x FY12e
EPS and 15x FY13e EPS, against an earnings CAGR of
11% over FY11-13e. We think Wipro is clearly in the
“cheap” zone at current P/E multiples – but we expect its
discount to larger peers would narrow only after we see
signs of revenue growth acceleration for its core IT
services business. We expect the stock to underperform
near-term. Muted Dec-11 quarter guidance remains a
key downside risk in our view
Key results positives:
1) Wipro maintained margins in its IT services business at
22% (-10bps qoq, -258bps yoy) despite muted revenue
growth and one month impact of salary hikes during the
quarter.
2) Utilization (excluding trainees) improved to 81% (+130bps
qoq).
3) Energy and utilities segment grew +14% qoq, +54% yoy.
4) Added 4,108 employees during the quarter.
Key results negatives:
1) Onsite price realizations in constant currency declined
-1.7% qoq and offshore -1.2% qoq on a constant currency
basis.
2) Wipro would have full three-month impact of wage hikes in
2Q along with another muted revenue as per the guidance.
This could lead to lower margins in 2Q.
3) Losses in other business moved up qoq in 1Q12.
Muted 2Q guidance: IT services revenue guidance for 2Q at
US$1436-1464m (+2% to +4% qoq) includes full three-month
impact of acquisition of ~US$40m. The organic growth
guidance could be flat to +2% qoq in our view, compared with
Infosys’ guidance of +3% to +5% qoq. Based on 2Q guidance,
Wipro would need revenue growth of 6-8% qoq to achieve
revenue growth of 16-18% yoy (industry growth as per
NASSCOM) in FY12e, in our view.
Conference Call Takeaways:
1) Wipro’s management commentary was in line with that of
TCS management and contrary to Infosys’. Management
indicated that there has been no change in its
decision-making cycle and no specific delays by clients.
2) Management expects growth in momentum verticals like
financial services, retail, healthcare and energy/utilities to
be a key revenue driver.
3) Wipro signed two large deals worth US$500m in 1Q and
maintains a healthy order pipeline.
4) Management indicated that the pricing environment
remains stable with an upward bias.
Price Target
Our price target for the stock is unchanged at Rs480 per share.
We use a discounted cash flow model and take a
probability-weighted average of our scenario values. Key
assumptions in our DCF include a cost of equity of 13.3% and a
terminal FCF growth rate of 4%. Other important assumptions
are as follows:
• Bull case value of Rs580 – weighting 40%: Revenue
and EBIT CAGRs of 23.7% and 22.7% for F2011-21;
gradual decline in margins to 17% by F2021e.
• Base case value of Rs 440 – weighting 50%: Revenue
and EBIT CAGRs of 20% and 19% for F2011-21; rising
costs cause decline in margins to 15% by F2021e.
• Bear case value of Rs280 – weighting 10%: Revenue
and EBIT CAGRs of 15.7% and 13.4% for F2011-21;
larger decline in margins to ~17% by F2021e.
Our price target implies 20x FY12e EPS and 17x FY13e EPS.
Key Risks
Downside risks include:
1) Significant slowdown in technology spending by US
clients;
2) Challenges for its BPO business, owing to high employee
attrition;
3) Integration issues or costs stemming from several small
acquisitions Wipro has made in the past.
Upside risks include:
1) Any large deals;
2) Better profitability of organic business and acquisitions;
3) Rupee depreciation to benefit margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro Ltd.
Muted 2Q guidance
What's Changed
FY12e/FY13e EPS Down by 3.8%/4.7%
Quick Comment: Wipro’s mid-teens revenue growth
should significantly lag its larger peers in FY12e, in our
view. Management expects Wipro to resume
industry-leading revenue growth rates from the Dec-11
or Mar-12 quarter onwards. While we await a turnaround
at Wipro after the recent management changes, we
maintain our Equal-weight rating on the stock.
Mixed Jun-11 results: IT services revenues of
US$1,408m (+0.5% qoq, +17% yoy) were below our
estimates; Q2 organic guidance is for flat qoq revenues,
in our view. FX gains helped reported consolidated
revenues and net income. Overall margins of 16.8%
(-74bps qoq, -275bps yoy) were lower than our
estimates due to higher losses in its “Other” business
segment. Net income of Rs13.3bn (-3% qoq, +1.2%
yoy) was higher than our estimates due to significantly
higher than expected FX gains during the quarter.
Financials: We now expect Wipro to achieve
US$ revenue growth of 16% yoy in IT services in FY12e,
including the SAIC acquisition. The organic revenue
growth would be ~13% yoy, in our view. Overall we
expect revenue growth of 18% yoy, EBIT margins of
17.7% (-70bps yoy) and net income growth of 8.5% yoy
in FY12e. We expect revenue and net income CAGRs of
19% and 11% respectively.
Valuations: Wipro is currently trading at 17x FY12e
EPS and 15x FY13e EPS, against an earnings CAGR of
11% over FY11-13e. We think Wipro is clearly in the
“cheap” zone at current P/E multiples – but we expect its
discount to larger peers would narrow only after we see
signs of revenue growth acceleration for its core IT
services business. We expect the stock to underperform
near-term. Muted Dec-11 quarter guidance remains a
key downside risk in our view
Key results positives:
1) Wipro maintained margins in its IT services business at
22% (-10bps qoq, -258bps yoy) despite muted revenue
growth and one month impact of salary hikes during the
quarter.
2) Utilization (excluding trainees) improved to 81% (+130bps
qoq).
3) Energy and utilities segment grew +14% qoq, +54% yoy.
4) Added 4,108 employees during the quarter.
Key results negatives:
1) Onsite price realizations in constant currency declined
-1.7% qoq and offshore -1.2% qoq on a constant currency
basis.
2) Wipro would have full three-month impact of wage hikes in
2Q along with another muted revenue as per the guidance.
This could lead to lower margins in 2Q.
3) Losses in other business moved up qoq in 1Q12.
Muted 2Q guidance: IT services revenue guidance for 2Q at
US$1436-1464m (+2% to +4% qoq) includes full three-month
impact of acquisition of ~US$40m. The organic growth
guidance could be flat to +2% qoq in our view, compared with
Infosys’ guidance of +3% to +5% qoq. Based on 2Q guidance,
Wipro would need revenue growth of 6-8% qoq to achieve
revenue growth of 16-18% yoy (industry growth as per
NASSCOM) in FY12e, in our view.
Conference Call Takeaways:
1) Wipro’s management commentary was in line with that of
TCS management and contrary to Infosys’. Management
indicated that there has been no change in its
decision-making cycle and no specific delays by clients.
2) Management expects growth in momentum verticals like
financial services, retail, healthcare and energy/utilities to
be a key revenue driver.
3) Wipro signed two large deals worth US$500m in 1Q and
maintains a healthy order pipeline.
4) Management indicated that the pricing environment
remains stable with an upward bias.
Price Target
Our price target for the stock is unchanged at Rs480 per share.
We use a discounted cash flow model and take a
probability-weighted average of our scenario values. Key
assumptions in our DCF include a cost of equity of 13.3% and a
terminal FCF growth rate of 4%. Other important assumptions
are as follows:
• Bull case value of Rs580 – weighting 40%: Revenue
and EBIT CAGRs of 23.7% and 22.7% for F2011-21;
gradual decline in margins to 17% by F2021e.
• Base case value of Rs 440 – weighting 50%: Revenue
and EBIT CAGRs of 20% and 19% for F2011-21; rising
costs cause decline in margins to 15% by F2021e.
• Bear case value of Rs280 – weighting 10%: Revenue
and EBIT CAGRs of 15.7% and 13.4% for F2011-21;
larger decline in margins to ~17% by F2021e.
Our price target implies 20x FY12e EPS and 17x FY13e EPS.
Key Risks
Downside risks include:
1) Significant slowdown in technology spending by US
clients;
2) Challenges for its BPO business, owing to high employee
attrition;
3) Integration issues or costs stemming from several small
acquisitions Wipro has made in the past.
Upside risks include:
1) Any large deals;
2) Better profitability of organic business and acquisitions;
3) Rupee depreciation to benefit margins.
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