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We initiate coverage of Wipro with a 3-Underweight rating and a 12-month price target
of INR340, based on a 30% discount to our target multiple for Infosys. Although we
believe that Wipro has strong domain and vertical knowledge, execution has been the
bane of company’s performance. Recent management restructuring has been focused
on improving execution but comes at a time when the overall growth environment
could be weakening. We thus believe that there is a high probability of slippage on
achieving growth targets and hence advise investors to be cautious.
Investment summary
Revenue growth is a worry: Wipro’s revenue growth has been unexciting in the past two
years (7.4% CAGR vs. Infosys at 12.6%, TCS at 15.8%). We believe that this is a reflection of
poor revenue mix (limited exposure to financials, high exposure to TMT) but, more
importantly, weak execution in the past few years.
Changes in management appear positive, but too early to take a view: Wipro’s
management has clearly recognised the issue with revenues and this led to the change in
CEO early on in the year. We believe this is positive; however, we believe it is too early to
take a view on the new management’s performance. Furthermore, given the tough macro
environment, churn in middle management could delay the company’s revenue recovery.
Still valued as a premium player but performance has been weak: While Wipro’s P/E
multiples have corrected in the past few years, they are still not cheap. Given the risks we
perceive, we value the shares at a 30% discount to the target multiple we use for Infosys,
leading to a price target of INR340.
Watch out for the acquisition-led strategy: Wipro has been the most acquisitive company
amongst the large-cap Indian IT vendors, with 10-plus acquisitions in the past decade.
However, these acquisitions have not led to a stronger revenue growth profile. We thus
have concerns about this use of balance sheet and the corresponding usage of
management bandwidth without evidence of adequate returns in terms of growth and
margins
Valuation
Our 12-month target price of INR340 for Wipro is based on a P/E of 12x, which we apply to
the average of our EPS estimates for FY2013 and FY2014, or INR28. For Wipro, our target
multiple is based on a 30% discount to our target multiple of 17.5x for Infosys, which is at
the low end of Wipro’s historical discount because we perceive a higher risk to Wipro’s
earnings growth going forward. Our target multiple for Infosys is in line with Infosys’s past
five-year average.
For the Indian IT vendors, we believe P/E is the most appropriate valuation method because
earnings best incorporate the two main drivers of the business: revenue growth that is a
result of new contract signings and margin resilience that comes from operational
efficiencies and position in the IT services value chain.
We rate Wipro 3-Underweight because our price target represents only 3% potential upside
– at the low end of its peer group – in the face of a high probability of slippage for Wipro on
achieving its growth targets.
Risks
The key risks to the upside that could keep our price target from being achieved, in our
view, are a stronger-than-forecast rebound in the macroeconomic situation and betterthan-
expected execution by the new management team. We note that while the company
has always had the industry expertise, it has historically had lapses in execution that have
hindered growth. Turnaround by the new management could drive upsides to our forecasts.
Key downside risk would come from macroeconomic factors that could further impede the
company’s already slow growth profile relative to its peers
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We initiate coverage of Wipro with a 3-Underweight rating and a 12-month price target
of INR340, based on a 30% discount to our target multiple for Infosys. Although we
believe that Wipro has strong domain and vertical knowledge, execution has been the
bane of company’s performance. Recent management restructuring has been focused
on improving execution but comes at a time when the overall growth environment
could be weakening. We thus believe that there is a high probability of slippage on
achieving growth targets and hence advise investors to be cautious.
Investment summary
Revenue growth is a worry: Wipro’s revenue growth has been unexciting in the past two
years (7.4% CAGR vs. Infosys at 12.6%, TCS at 15.8%). We believe that this is a reflection of
poor revenue mix (limited exposure to financials, high exposure to TMT) but, more
importantly, weak execution in the past few years.
Changes in management appear positive, but too early to take a view: Wipro’s
management has clearly recognised the issue with revenues and this led to the change in
CEO early on in the year. We believe this is positive; however, we believe it is too early to
take a view on the new management’s performance. Furthermore, given the tough macro
environment, churn in middle management could delay the company’s revenue recovery.
Still valued as a premium player but performance has been weak: While Wipro’s P/E
multiples have corrected in the past few years, they are still not cheap. Given the risks we
perceive, we value the shares at a 30% discount to the target multiple we use for Infosys,
leading to a price target of INR340.
Watch out for the acquisition-led strategy: Wipro has been the most acquisitive company
amongst the large-cap Indian IT vendors, with 10-plus acquisitions in the past decade.
However, these acquisitions have not led to a stronger revenue growth profile. We thus
have concerns about this use of balance sheet and the corresponding usage of
management bandwidth without evidence of adequate returns in terms of growth and
margins
Valuation
Our 12-month target price of INR340 for Wipro is based on a P/E of 12x, which we apply to
the average of our EPS estimates for FY2013 and FY2014, or INR28. For Wipro, our target
multiple is based on a 30% discount to our target multiple of 17.5x for Infosys, which is at
the low end of Wipro’s historical discount because we perceive a higher risk to Wipro’s
earnings growth going forward. Our target multiple for Infosys is in line with Infosys’s past
five-year average.
For the Indian IT vendors, we believe P/E is the most appropriate valuation method because
earnings best incorporate the two main drivers of the business: revenue growth that is a
result of new contract signings and margin resilience that comes from operational
efficiencies and position in the IT services value chain.
We rate Wipro 3-Underweight because our price target represents only 3% potential upside
– at the low end of its peer group – in the face of a high probability of slippage for Wipro on
achieving its growth targets.
Risks
The key risks to the upside that could keep our price target from being achieved, in our
view, are a stronger-than-forecast rebound in the macroeconomic situation and betterthan-
expected execution by the new management team. We note that while the company
has always had the industry expertise, it has historically had lapses in execution that have
hindered growth. Turnaround by the new management could drive upsides to our forecasts.
Key downside risk would come from macroeconomic factors that could further impede the
company’s already slow growth profile relative to its peers
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