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Wipro (WPRO)
Technology
In a tough spot. Wipro faces a tough challenge turning around its performance
relative to peers, in our view. Even as the company has taken aggressive personnel
decisions and made changes to the organization structure, a turnaround in revenue
growth trajectory faces challenges from (1) potential demand softening, and (2)
increased aggression from competitors. Also, Wipro needs to meet the P&L turnaround
challenge while keeping an eye on the balance sheet and return ratios – both of these
have weakened meaningfully in recent quarters.
Benefits of reorganization some time away
Even as we view Wipro’s renewed focus and the recent organization structure changes positively,
we believe results could take a while to show up. A turnaround in revenue growth trajectory,
relative to peers, could take longer than the management’s indicated timeframe of 3 quarters
starting 1QFY12. We see the following challenges, some external and some internal
Pockets of demand softness, especially the European banks. Wipro’s BFSI exposure (26.7% of
revenues) is relatively more Europe-centric as compared to peers.
Increased volume aggression from competitors, especially Infosys.
Mid/senior management attrition has increased post the reorganization.
Reorganization would have potentially impacted traction from some of existing accounts, given
the magnitude of change at the front-end.
Even as Wipro is indicating early signs of success as far as new deal win rate is concerned,
ramp-up from new deals takes time to start impacting the overall revenue growth.
In summary, Wipro needs to deliver in a market that is getting increasingly challenging.
Turnaround targets also face the risk of a slowdown in decision making at clients’ end. Complete
stability in the new organization structure could be some time away as well, in our view.
Deterioration in return ratios and balance sheet in recent quarters worrying
Wipro needs to meet the P&L turnaround challenge while keeping an eye on the balance sheet
and return ratios – both of these have weakened meaningfully in recent quarters. IT (services +
products) ROCE is down 10 percentage points in the past 6 quarters, consolidated ROCE is down
500 bps in the past 7 quarters, and receivables days (including unbilled revenues) have jumped to
102 from 81 in the past 7 quarters.
Valuations comforting – however, discount to Infosys has narrowed
Positive view on Wipro (besides valuation argument) hinges on a catch-up on revenue
growth with peers. This in our view can happen in FY2013E at the earliest, for reasons
discussed earlier in the note. Valuation at 14.2X FY2013E EPS is within the comfort zone,
suggesting limited downside from current levels. Nonetheless, we note that Wipro’s PE
discount to Infosys has come down to 10% (19% to TCS). We note that during the last
downturn, Wipro’s discount to Infosys had widened to as high as 42%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro (WPRO)
Technology
In a tough spot. Wipro faces a tough challenge turning around its performance
relative to peers, in our view. Even as the company has taken aggressive personnel
decisions and made changes to the organization structure, a turnaround in revenue
growth trajectory faces challenges from (1) potential demand softening, and (2)
increased aggression from competitors. Also, Wipro needs to meet the P&L turnaround
challenge while keeping an eye on the balance sheet and return ratios – both of these
have weakened meaningfully in recent quarters.
Benefits of reorganization some time away
Even as we view Wipro’s renewed focus and the recent organization structure changes positively,
we believe results could take a while to show up. A turnaround in revenue growth trajectory,
relative to peers, could take longer than the management’s indicated timeframe of 3 quarters
starting 1QFY12. We see the following challenges, some external and some internal
Pockets of demand softness, especially the European banks. Wipro’s BFSI exposure (26.7% of
revenues) is relatively more Europe-centric as compared to peers.
Increased volume aggression from competitors, especially Infosys.
Mid/senior management attrition has increased post the reorganization.
Reorganization would have potentially impacted traction from some of existing accounts, given
the magnitude of change at the front-end.
Even as Wipro is indicating early signs of success as far as new deal win rate is concerned,
ramp-up from new deals takes time to start impacting the overall revenue growth.
In summary, Wipro needs to deliver in a market that is getting increasingly challenging.
Turnaround targets also face the risk of a slowdown in decision making at clients’ end. Complete
stability in the new organization structure could be some time away as well, in our view.
Deterioration in return ratios and balance sheet in recent quarters worrying
Wipro needs to meet the P&L turnaround challenge while keeping an eye on the balance sheet
and return ratios – both of these have weakened meaningfully in recent quarters. IT (services +
products) ROCE is down 10 percentage points in the past 6 quarters, consolidated ROCE is down
500 bps in the past 7 quarters, and receivables days (including unbilled revenues) have jumped to
102 from 81 in the past 7 quarters.
Valuations comforting – however, discount to Infosys has narrowed
Positive view on Wipro (besides valuation argument) hinges on a catch-up on revenue
growth with peers. This in our view can happen in FY2013E at the earliest, for reasons
discussed earlier in the note. Valuation at 14.2X FY2013E EPS is within the comfort zone,
suggesting limited downside from current levels. Nonetheless, we note that Wipro’s PE
discount to Infosys has come down to 10% (19% to TCS). We note that during the last
downturn, Wipro’s discount to Infosys had widened to as high as 42%.
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