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Key Takeaways
Restructuring on track, efforts to translate into growth in a couple of quarters
The restructuring exercise is largely behind Wipro (WPRO) and the management
stated that indicators of the new strategy bearing fruit were present.
WPRO is confident some of the recent wins will start showing in revenue growth in
a couple of quarters' time, facilitating stated objective to match/beat peer growth.
Budgets intact thus far, industry maybe hit with a lag, mayhem of 2008 unlikely
It has been only weeks since the turmoil has picked up in magnitude, after the S&P
downgrade of the US; and hence, too early for clients to react with budget cuts.
However, WPRO does not expect large customers to be fighting for survival this
time, unlike in 2008. But any slowdown will be after a lag as, even after the Lehman
collapse, it took clients nearly two months to announce significant volume cuts.
Margins to be hit in the near term, target of maintaining current levels
While WPRO aims to manage its margins within a narrow band (22.1% EBIT margin
in IT Services in 1QFY12), headwinds are expected to pull down margins in the near
term because: (1) Two months of wage inflation impact in 2Q; (2) Continued
investment in growth as it aligns its sales force to focus verticals; (3) 2QFY12 will
witness the full quarter impact from SAIC, which are at much lower profitability.
WPRO expects to limit the impact of lower margins through the following levers: (1)
revenue productivity, (2) employee pyramid management, (3) cost cuts on subcontracted
employees and (4) increase in proportion of non-linear revenue.
Attrition scenario not alarming, re-org driven exits largely behind WPRO
WPRO has witnessed higher attrition than peers and the exits in the top cadre after
the organizational re-jig were in line with its expectations. WPRO believes key
personnel are in place and the exits are largely behind it and expects attrition to
decline going forward despite the wage hikes.
WPRO brings freshers onboard through three threads of hiring: (1) Visiting key
campuses; (2) Non-engineers, who go through a four-year work-cum-study program
and end up with a Masters degree, hence have high retention rate; (3) Off-campus
hires, which happen during the mid to second half of a calendar year.
Valuation and view
Performance on customer additions and client mining lends increasing confidence
that WPRO's FY13 revenue growth should match that peers like TCS (FY13 USD
revenue growth of 19.1%) and Infosys (FY13 USD revenue growth of 19.2%).
Our EPS estimates are INR23.2 for FY12 and INR27.4 for FY13. Maintain Buy with a
target price of INR466 based on 17x FY13E earnings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key Takeaways
Restructuring on track, efforts to translate into growth in a couple of quarters
The restructuring exercise is largely behind Wipro (WPRO) and the management
stated that indicators of the new strategy bearing fruit were present.
WPRO is confident some of the recent wins will start showing in revenue growth in
a couple of quarters' time, facilitating stated objective to match/beat peer growth.
Budgets intact thus far, industry maybe hit with a lag, mayhem of 2008 unlikely
It has been only weeks since the turmoil has picked up in magnitude, after the S&P
downgrade of the US; and hence, too early for clients to react with budget cuts.
However, WPRO does not expect large customers to be fighting for survival this
time, unlike in 2008. But any slowdown will be after a lag as, even after the Lehman
collapse, it took clients nearly two months to announce significant volume cuts.
Margins to be hit in the near term, target of maintaining current levels
While WPRO aims to manage its margins within a narrow band (22.1% EBIT margin
in IT Services in 1QFY12), headwinds are expected to pull down margins in the near
term because: (1) Two months of wage inflation impact in 2Q; (2) Continued
investment in growth as it aligns its sales force to focus verticals; (3) 2QFY12 will
witness the full quarter impact from SAIC, which are at much lower profitability.
WPRO expects to limit the impact of lower margins through the following levers: (1)
revenue productivity, (2) employee pyramid management, (3) cost cuts on subcontracted
employees and (4) increase in proportion of non-linear revenue.
Attrition scenario not alarming, re-org driven exits largely behind WPRO
WPRO has witnessed higher attrition than peers and the exits in the top cadre after
the organizational re-jig were in line with its expectations. WPRO believes key
personnel are in place and the exits are largely behind it and expects attrition to
decline going forward despite the wage hikes.
WPRO brings freshers onboard through three threads of hiring: (1) Visiting key
campuses; (2) Non-engineers, who go through a four-year work-cum-study program
and end up with a Masters degree, hence have high retention rate; (3) Off-campus
hires, which happen during the mid to second half of a calendar year.
Valuation and view
Performance on customer additions and client mining lends increasing confidence
that WPRO's FY13 revenue growth should match that peers like TCS (FY13 USD
revenue growth of 19.1%) and Infosys (FY13 USD revenue growth of 19.2%).
Our EPS estimates are INR23.2 for FY12 and INR27.4 for FY13. Maintain Buy with a
target price of INR466 based on 17x FY13E earnings.
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