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Economic uncertainty could
delay any revival; maintain
Neutral
2QFY12: 3% revenue growth, 200bp margin decline expected
We expect Wipro’s IT Services business to post USD revenue growth of
3.4% q-q (1.3% organic growth), which would be near the higher end of its
guidance (2-4%). EBIT margins in IT services are likely to dip by 200bps
q-q on the partial impact of wage hikes and the SAIC acquisition. We think
there could be disappointment if Wipro guides for less than 3% q-q growth
in 3Q.
Action: Downturn a setback to revival efforts; maintain Neutral
We believe the economic uncertainty and impending growth moderation
have come at the wrong time for Wipro, which is trying to restructure and
close the growth gap with its peers. We see economic uncertainty setting
back Wipro’s revival efforts, adding to the high risks to growth in FY13F on
account of: 1) weak near-term deal flow; and 2) slow decision-making
reducing the possibility of a near-term revival. Wipro remains our leastpreferred
tier-1 Indian IT stock, as we believe it has the slowest earnings
and revenue growth outlook among peers and lacks immediate triggers.
Catalysts: Continued underperformance on growth and pricing cuts
Valuation: Raise TP to INR340 based on 14x FY13F EPS
We expect Wipro to deliver a CAGR of 11% in revenue growth and 6% in
EPS over FY11-13F. The 14x multiple is a ~20% discount to our target
multiple for Infosys and TCS, justified given the lag in revenue revival and
below par earnings growth.
Limited upside triggers, Maintain Neutral
We raise our target price to INR340 (from INR330) and maintain our Neutral rating on
Wipro, as we believe Wipro’s efforts at reducing its lag relative to its peers are at further
risk due to economic uncertainties and anticipated deal decision-making delays. Further,
we see Wipro having to raise its efforts to gain lost momentum as HCL Tech did during
the last downturn, which could limit upside to margins. Wipro remains our least-preferred
stock in tier 1 IT.
Valuation methodology
We value Wipro at 14x our FY13F EPS forecast of INR24.3, which is at a ~20% discount
to our target multiple for Infosys and TCS. The discount, in our view, is justified given the
lag in revenue revival and below par earnings growth.
Risks to valuation
The key risks include: 1) worse-than-anticipated demand slowdown and breakage of
pricing discipline; 2) rupee appreciation; and 3) client-specific issues.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economic uncertainty could
delay any revival; maintain
Neutral
2QFY12: 3% revenue growth, 200bp margin decline expected
We expect Wipro’s IT Services business to post USD revenue growth of
3.4% q-q (1.3% organic growth), which would be near the higher end of its
guidance (2-4%). EBIT margins in IT services are likely to dip by 200bps
q-q on the partial impact of wage hikes and the SAIC acquisition. We think
there could be disappointment if Wipro guides for less than 3% q-q growth
in 3Q.
Action: Downturn a setback to revival efforts; maintain Neutral
We believe the economic uncertainty and impending growth moderation
have come at the wrong time for Wipro, which is trying to restructure and
close the growth gap with its peers. We see economic uncertainty setting
back Wipro’s revival efforts, adding to the high risks to growth in FY13F on
account of: 1) weak near-term deal flow; and 2) slow decision-making
reducing the possibility of a near-term revival. Wipro remains our leastpreferred
tier-1 Indian IT stock, as we believe it has the slowest earnings
and revenue growth outlook among peers and lacks immediate triggers.
Catalysts: Continued underperformance on growth and pricing cuts
Valuation: Raise TP to INR340 based on 14x FY13F EPS
We expect Wipro to deliver a CAGR of 11% in revenue growth and 6% in
EPS over FY11-13F. The 14x multiple is a ~20% discount to our target
multiple for Infosys and TCS, justified given the lag in revenue revival and
below par earnings growth.
Limited upside triggers, Maintain Neutral
We raise our target price to INR340 (from INR330) and maintain our Neutral rating on
Wipro, as we believe Wipro’s efforts at reducing its lag relative to its peers are at further
risk due to economic uncertainties and anticipated deal decision-making delays. Further,
we see Wipro having to raise its efforts to gain lost momentum as HCL Tech did during
the last downturn, which could limit upside to margins. Wipro remains our least-preferred
stock in tier 1 IT.
Valuation methodology
We value Wipro at 14x our FY13F EPS forecast of INR24.3, which is at a ~20% discount
to our target multiple for Infosys and TCS. The discount, in our view, is justified given the
lag in revenue revival and below par earnings growth.
Risks to valuation
The key risks include: 1) worse-than-anticipated demand slowdown and breakage of
pricing discipline; 2) rupee appreciation; and 3) client-specific issues.
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