Wipro: Core strategy still evolving :Motilal Oswal

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Core strategy still evolving
Wait for execution before going bullish
 Has underperformed peers on a sustained basis - both on the revenue
and margin front.
 While management commentary indicates the possibility of matching if
not outperforming industry growth by 4QFY12, we are wary about the
sustenance of the same in FY13 amid global headwinds.
 Valuations appear reasonable despite sharp cut in estimates, but the
company's core strategy is still evolving. We would wait for fruition before
going bullish. Downgrade to Neutral.

Sustained underperformance on revenue growth v/s peers
Wipro has underperformed peers on both revenue growth and margins over the past 5
quarters. While we believe the recent restructuring would yield results over time, and
management commentary of meeting if not exceeding industry growth rates by 4QFY12
is a possibility on the back of large deal wins in BFS, we are wary about Wipro's ability
to sustain performance. The key reasons for this are:
 Momentum verticals (BFSI, Energy & Utilities, Retail, and Healthcare) would
have to grow by 5% QoQ to achieve a 3% growth for the company on a YoY
basis.
 Healthcare (a momentum vertical), which accounts for 10% of Wipro's revenues,
is currently in the investment phase and it could take 4 quarters before we see any
meaningful growth.
 Wipro's non-momentum verticals (Telecom & Media and Manufacturing & Hitech),
which account for 36% of its business, will also need to contribute to revenue
growth for sustained outperformance v/s peers.


Margin performance has seen a sustained downtrend
Wipro has seen a sustained decline in margins over the past 4 quarters. It plans to restrict
this downtrend by using various levers, one being reduced subcontracting. Subcontracting
forms 22% of the company's cost of revenues, which is much higher than peers. Reducing
subcontracting could show up in the form of more aggressive hiring and volume growth
with no visible change in revenue growth. We believe this could be an immediate lever for
margin expansion. However, we would watch for the pace at which Wipro is able to
execute this change.


Core strategy at Wipro is still evolving
We believe the core strategy at Wipro is still evolving. While key components in the form
of (1) focus on momentum verticals, (2) improving margins by reducing subcontracting
cost apart from improving the pyramid, and (3) improving client mining capabilities (the
restructuring helps in our view) are clearly articulated, recent media reports of Wipro
selling its datacenter business and Infocrossing calling it non-core are yet to be understood


Cutting FY13 revenue/EPS estimates by 5/10%
We do not build in a convergence in growth rates in FY13, and we expect Wipro's growth
rates to remain below peers like HCL and TCS. While the company may have the necessary
engine in place, Wipro could do with a more sanguine macro environment to facilitate the
same. We cut our revenue estimate by 5% and EPS estimate by 10% for FY13. Continued
deal wins and stable margins will be essential for any upgrades to our numbers.


Valuations reasonable, but we would wait for execution before going bullish
Wipro trades at 13.4x FY13E EPS. We note that our 12% revenue growth assumption for
Wipro in FY13 is lower than peers. However, we would watch for Wipro's ability to
manoeuvre in an increasingly challenging environment and show signs of ability to sustain
peer-matching growth. The key signposts for going bullish on Wipro would be (1) fruition
of industry level or leading growth in 4QFY12, (2) visible improvement in margins over the
next two quarters and (3) commentary on how the company plans to sustain it