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Wipro’s revenues and net profits surpassed estimates marginally. It
reported a 4.5% QoQ growth (in constant currency) in IT services business.
While the constant currency growth was in-line with peers - Infosys and
TCS - the volume growth at 1.8% remained weak. The beat came primarily
on account of realization improvement QoQ (4.3% onsite, 3.6% offshore)
that scaled back from the decline in earlier quarter. We note that on a liketo-
like basis, pricing remained flat. While the guidance for Q4FY12 of 1%-
3% growth is better than Infosys’ flat guidance it belies expectation of an
improvement in growth trajectory (4.5% cc growth in Q3). At P/E of 15.3x
FY13, Wipro is trading at par with Infosys and at 30%+ premium to HCLT,
offering limited upside potential. We maintain ‘HOLD’ but prefer HCLT.
Operating margin improvement to lag peers
Wipro’s IT services operating margins (EBIT) improved by only 80bps QoQ at 20.8%,
impacted by its cash flow hedging loss (excluding which, it improved 270bps). Further,
margin benefit from realization improvement was offset by a utilization drop of 300bps
and higher S&M costs, leading to a lower than expected margin performance. We note
that the benefit of weak rupee will flow in with a lag of 3-4 quarters for Wipro given its
policy of cash flow hedge accounting.
Focus area of client engagement makes progress
Historically, Wipro’s large account management has been a weak area that has been
receiving major attention in its new strategy. Investments in changing the client facing
team, direct account responsibility and rigorous monitoring are showing gradual
results. It has seen an increase of four clients in USD50mn+ revenue range and five in
the USD100mn+ range, YoY.
Outlook and valuations: Limited upside; maintain ‘HOLD’
Wipro has outperformed the IT index by over 12% in the past two months in
anticipation of its growth tracking peers. However, rather than an improvement in its
growth, it is the deceleration of peers that is leading to its performance at par with
them. This limits any upward re-rating in the stock. We maintain our ‘HOLD’ rating with
target of INR405.
Key highlights
• Overall revenue, at INR98.8bn, rose 9.7% QoQ and 26.3% YoY and was ahead of our
INR95.9bn estimate. IT services revenue stood at USD1,505mn against expectation of
USD1,498mn, up 2.2% QoQ.
• Gross profit, at INR29.1bn, surged 16.0% QoQ. Gross margin, at 29.5%, expanded
160bps sequentially due to higher realized rate.
• Operating profit (EBIT) for the quarter stood at INR16.1bn, up 14.8% QoQ. EBIT margin,
at 16.3%, increased 80bps QoQ as higher SG&A costs partially offset gross margin
benefits.
• Wipro’s net margin, at 14.7%, was up marginally 30bps QoQ. Net profit stood at
INR14.6bn, up 12.0% sequentially, primarily on account of higher operating margin. The
company reported a higher foreign exchange gain of INR1,164mn (versus INR875mn in
the previous quarter).
• IT services business
• IT services revenue stood at INR76.1bn (USD1,505mn), representing sequential
growth of 11.4% in INR and 2.2% in USD. Overall volume growth for the quarter of
1.8% was lower than expectation of 3.0%, onsite volume rose 1.5% QoQ while
offshore volume grew 2.0% QoQ.
• Realisation: On reported basis, onsite and offshore realisations improved 2.9% and
2.2% QoQ, respectively. On constant currency basis, onsite realizations were up
4.3% and offshore by 3.6% QoQ led by improvement in productivity in fixed price
projects.
• While EBIT, at INR15.8bn, jumped 16% QoQ, EBIT margin was up 80bps to 20.8%.
• Q4 guidance: For IT services, Wipro has given a guidance of USD1,520-1,550mn
(implied growth of 1.0-3.0% QoQ).
• IT products business
• Revenue, at INR9.0bn, fell sequentially by 10.1%. EBIT stands at INR475mn, up 5.3%,
against the previous quarter. EBIT margin improved 80bps QoQ to5.3%.
• Customer care and lighting business
• Revenue for the segment grew 9.8% QoQ to INR8.8bn. EBIT surged 18.5%
sequentially to INR1,045mn. Operating margin stood at 11.9%, up 90bps
sequentially.
• Service line performance: Traction seen in ADM and Business Application Services (BAS)
during the quarter as they posted 4.0% and 3.2% QoQ growth, respectively. Analytics and
information management (AIM), technology infrastructure services and product
engineering & mobility (PE&M), reported sequential growth of 2.2%, 0.4%, and 2.2%,
respectively. BPO continued decline for third consecutive quarter and dipped 1.2% QoQ.
Company Description
Wipro is a leading Indian company with business interests in export of IT & BPO services,
domestic hardware, consumer lighting, and consumer care. It has the widest range of
services, including systems integration, IT-enabled services, package implementation,
software application development & maintenance, and R&D services. Wipro is the first P
CMM Level 5 and SEI CMM Level 5-certified IT services company in the world. It has more
than 953 clients spanning the BFSI, manufacturing, retail, utilities, and telecom verticals.
Wipro has over 136,734 employees. The company’s revenues for the past twelve months
stood at INR 357bn (USD7.7bn).
Investment Theme
Wipro undertook a restructuring exercise with the appointment of new CEO, T K Kurien. It
realigned client facing profiles and is focusing on mining strategic accounts to grow its
business. Its client mining efforts are paying off and hence revenue growth improved in
Q2FY12. While the client mining efforts will ensure that Wipro’s revenue growth improves,
it needs to win new large clients to catch up on growth with peers. In Q1FY12 it won two
large deals with TCV of USD 500mn from BFSI clients. It needs to improve its large deal
market share to deliver on its guidance of reporting revenue growth at par with that of
peers. In Q2FY12 its margins declined due to slippages in execution of fixed price projects.
Wipro also needs to improve its execution capabilities for it to become a preferred holding
for investors. We believe, Wipro needs to still catch up with larger peers and hence maintain
HOLD.
Key Risks
Key risks to our investment theme include – double dip recession in major market US and
prolonged slowdown in Europe, sharp cross currency movements and appreciation of rupee
against USD, Euro and GBP and low bench strength may impact the ability to cater to rapid
increase in volume.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro’s revenues and net profits surpassed estimates marginally. It
reported a 4.5% QoQ growth (in constant currency) in IT services business.
While the constant currency growth was in-line with peers - Infosys and
TCS - the volume growth at 1.8% remained weak. The beat came primarily
on account of realization improvement QoQ (4.3% onsite, 3.6% offshore)
that scaled back from the decline in earlier quarter. We note that on a liketo-
like basis, pricing remained flat. While the guidance for Q4FY12 of 1%-
3% growth is better than Infosys’ flat guidance it belies expectation of an
improvement in growth trajectory (4.5% cc growth in Q3). At P/E of 15.3x
FY13, Wipro is trading at par with Infosys and at 30%+ premium to HCLT,
offering limited upside potential. We maintain ‘HOLD’ but prefer HCLT.
Operating margin improvement to lag peers
Wipro’s IT services operating margins (EBIT) improved by only 80bps QoQ at 20.8%,
impacted by its cash flow hedging loss (excluding which, it improved 270bps). Further,
margin benefit from realization improvement was offset by a utilization drop of 300bps
and higher S&M costs, leading to a lower than expected margin performance. We note
that the benefit of weak rupee will flow in with a lag of 3-4 quarters for Wipro given its
policy of cash flow hedge accounting.
Focus area of client engagement makes progress
Historically, Wipro’s large account management has been a weak area that has been
receiving major attention in its new strategy. Investments in changing the client facing
team, direct account responsibility and rigorous monitoring are showing gradual
results. It has seen an increase of four clients in USD50mn+ revenue range and five in
the USD100mn+ range, YoY.
Outlook and valuations: Limited upside; maintain ‘HOLD’
Wipro has outperformed the IT index by over 12% in the past two months in
anticipation of its growth tracking peers. However, rather than an improvement in its
growth, it is the deceleration of peers that is leading to its performance at par with
them. This limits any upward re-rating in the stock. We maintain our ‘HOLD’ rating with
target of INR405.
Key highlights
• Overall revenue, at INR98.8bn, rose 9.7% QoQ and 26.3% YoY and was ahead of our
INR95.9bn estimate. IT services revenue stood at USD1,505mn against expectation of
USD1,498mn, up 2.2% QoQ.
• Gross profit, at INR29.1bn, surged 16.0% QoQ. Gross margin, at 29.5%, expanded
160bps sequentially due to higher realized rate.
• Operating profit (EBIT) for the quarter stood at INR16.1bn, up 14.8% QoQ. EBIT margin,
at 16.3%, increased 80bps QoQ as higher SG&A costs partially offset gross margin
benefits.
• Wipro’s net margin, at 14.7%, was up marginally 30bps QoQ. Net profit stood at
INR14.6bn, up 12.0% sequentially, primarily on account of higher operating margin. The
company reported a higher foreign exchange gain of INR1,164mn (versus INR875mn in
the previous quarter).
• IT services business
• IT services revenue stood at INR76.1bn (USD1,505mn), representing sequential
growth of 11.4% in INR and 2.2% in USD. Overall volume growth for the quarter of
1.8% was lower than expectation of 3.0%, onsite volume rose 1.5% QoQ while
offshore volume grew 2.0% QoQ.
• Realisation: On reported basis, onsite and offshore realisations improved 2.9% and
2.2% QoQ, respectively. On constant currency basis, onsite realizations were up
4.3% and offshore by 3.6% QoQ led by improvement in productivity in fixed price
projects.
• While EBIT, at INR15.8bn, jumped 16% QoQ, EBIT margin was up 80bps to 20.8%.
• Q4 guidance: For IT services, Wipro has given a guidance of USD1,520-1,550mn
(implied growth of 1.0-3.0% QoQ).
• IT products business
• Revenue, at INR9.0bn, fell sequentially by 10.1%. EBIT stands at INR475mn, up 5.3%,
against the previous quarter. EBIT margin improved 80bps QoQ to5.3%.
• Customer care and lighting business
• Revenue for the segment grew 9.8% QoQ to INR8.8bn. EBIT surged 18.5%
sequentially to INR1,045mn. Operating margin stood at 11.9%, up 90bps
sequentially.
• Service line performance: Traction seen in ADM and Business Application Services (BAS)
during the quarter as they posted 4.0% and 3.2% QoQ growth, respectively. Analytics and
information management (AIM), technology infrastructure services and product
engineering & mobility (PE&M), reported sequential growth of 2.2%, 0.4%, and 2.2%,
respectively. BPO continued decline for third consecutive quarter and dipped 1.2% QoQ.
Company Description
Wipro is a leading Indian company with business interests in export of IT & BPO services,
domestic hardware, consumer lighting, and consumer care. It has the widest range of
services, including systems integration, IT-enabled services, package implementation,
software application development & maintenance, and R&D services. Wipro is the first P
CMM Level 5 and SEI CMM Level 5-certified IT services company in the world. It has more
than 953 clients spanning the BFSI, manufacturing, retail, utilities, and telecom verticals.
Wipro has over 136,734 employees. The company’s revenues for the past twelve months
stood at INR 357bn (USD7.7bn).
Investment Theme
Wipro undertook a restructuring exercise with the appointment of new CEO, T K Kurien. It
realigned client facing profiles and is focusing on mining strategic accounts to grow its
business. Its client mining efforts are paying off and hence revenue growth improved in
Q2FY12. While the client mining efforts will ensure that Wipro’s revenue growth improves,
it needs to win new large clients to catch up on growth with peers. In Q1FY12 it won two
large deals with TCV of USD 500mn from BFSI clients. It needs to improve its large deal
market share to deliver on its guidance of reporting revenue growth at par with that of
peers. In Q2FY12 its margins declined due to slippages in execution of fixed price projects.
Wipro also needs to improve its execution capabilities for it to become a preferred holding
for investors. We believe, Wipro needs to still catch up with larger peers and hence maintain
HOLD.
Key Risks
Key risks to our investment theme include – double dip recession in major market US and
prolonged slowdown in Europe, sharp cross currency movements and appreciation of rupee
against USD, Euro and GBP and low bench strength may impact the ability to cater to rapid
increase in volume.
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