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We met the management of Wipro to understand the deal pipeline, post
restructuring, and impact on recovery due to global turmoil. The management
highlighted positive momentum in the deal pipeline compared to 2-3 quarters back,
but not translated into revenue as yet. Moreover, hedge book will dampen the
growth at the bottom-line due to currency depreciation. We see outperformance of
last three months ahead of fundamentals. We reiterate our ‘Accumulate’ rating.
Cross‐currency movement could hold negative surprise: The management tone
was more optimistic compared to two quarters back. The deal pipeline is much
stronger compared to what it was prior to restructuring. However, the pipeline
is yet to be translated into business. We see the current turmoil to delay the
pace of recovery for Wipro. We see ~7% outperformance of Wipro compared to
CNXIT index over last three months ahead of fundamentals. In Q3FY12, Wipro
will deliver growth at the lower-end of guidance due to cross-currency impact.
On the path of recovery, but margin stickiness looks difficult: Wipro’s EBITDA
margin eroded by 383bps in the last six quarters, highest among peers {INFO
(59bps), TCS (69bps), and HCLT (154bps)}. However, we expect operating margin
erosion (@cc) for Wipro in FY12 as it needs to invest in S&M (to gain ground)
and bring utilization down (higher utilization compared to peers). Moreover, the
management does not want to gain market-share at the cost of margin.
Other highlights: 1) Cross-currency movement to erode ~1.5% USD revenue 2)
Customer feed-back indicates gain in wallet share 3) Negative impact on PAT
due to US$1.7bn hedge 4) Likely to see improved performance of sales and
delivery due to linkage of variable pay to customer satisfaction 5) Not reached 4-
6% QoQ sustainable growth rate 6) Productivity recoup in FPP project.
Valuation and Recommendation: We expect Wipro to lag peers in terms of
operating performance (revenue and margin) in near term. We do not see an
opportunity for earnings upgrade post Q3FY12. Hence, we expect the
outperformance in last three months to reverse. We reiterate our ‘Accumulate’
rating, with target price of Rs410, 17x FY13e estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We met the management of Wipro to understand the deal pipeline, post
restructuring, and impact on recovery due to global turmoil. The management
highlighted positive momentum in the deal pipeline compared to 2-3 quarters back,
but not translated into revenue as yet. Moreover, hedge book will dampen the
growth at the bottom-line due to currency depreciation. We see outperformance of
last three months ahead of fundamentals. We reiterate our ‘Accumulate’ rating.
Cross‐currency movement could hold negative surprise: The management tone
was more optimistic compared to two quarters back. The deal pipeline is much
stronger compared to what it was prior to restructuring. However, the pipeline
is yet to be translated into business. We see the current turmoil to delay the
pace of recovery for Wipro. We see ~7% outperformance of Wipro compared to
CNXIT index over last three months ahead of fundamentals. In Q3FY12, Wipro
will deliver growth at the lower-end of guidance due to cross-currency impact.
On the path of recovery, but margin stickiness looks difficult: Wipro’s EBITDA
margin eroded by 383bps in the last six quarters, highest among peers {INFO
(59bps), TCS (69bps), and HCLT (154bps)}. However, we expect operating margin
erosion (@cc) for Wipro in FY12 as it needs to invest in S&M (to gain ground)
and bring utilization down (higher utilization compared to peers). Moreover, the
management does not want to gain market-share at the cost of margin.
Other highlights: 1) Cross-currency movement to erode ~1.5% USD revenue 2)
Customer feed-back indicates gain in wallet share 3) Negative impact on PAT
due to US$1.7bn hedge 4) Likely to see improved performance of sales and
delivery due to linkage of variable pay to customer satisfaction 5) Not reached 4-
6% QoQ sustainable growth rate 6) Productivity recoup in FPP project.
Valuation and Recommendation: We expect Wipro to lag peers in terms of
operating performance (revenue and margin) in near term. We do not see an
opportunity for earnings upgrade post Q3FY12. Hence, we expect the
outperformance in last three months to reverse. We reiterate our ‘Accumulate’
rating, with target price of Rs410, 17x FY13e estimates.
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