Downgrade to Neutral. Moderate valuations may still see the stock give
10%+ returns over the next 9-12 months, but signals of a firmer recovery
to give sustained stock returns to justify OW remain elusive. Wipro
continues to struggle with its recovery and does not give any definitive signal(s)
that it is about to turn the corner in the next six months. The quarter came in
below the street’s expectations, rounding out FY13 with 5% revenue growth in
IT Services (or 7.4% growth in constant currency). However, what worried us a
bit more is the tepid revenue growth guidance for 1QFY14 (-0.6% to +1.6%
growth Q/Q), which means that recovery coming in time for a close-to-
Nasscom industry average growth in FY14 seems unlikely (say, within 100-200
bps of Nasscom’s growth range of 12-14%). We only partially agree with the
company’s explanation for its weak revenue 1QFY14 guidance (pointing to
a seasonally weaker June quarter for its India business). The fact is that
rather few verticals and service lines are performing well at the moment for
Wipro (energy & utilities, infra-management, analytics are among the few
bright spots) to be able to move the needle on a company of its size. Wipro
needs multiple growth engines to fire, which is not happening at the moment.
That said, we believe that Wipro is still doing most of the right things in
setting its house in order – be it (a) working on improving customer
satisfaction and employee satisfaction scores, (b) hiring a good team of
experienced hunters that can capably open doors, (c) working with a reasonably
successful methodology/architecture to improve traction with top-10 clients
(though progress in rolling this out to the broader client base is still elusive), (d)
moderating attrition (in this respect, it fares better than peer Infosys), (e)
improving win rates in deals and (f) credible initiatives at improving
productivity and increased automation through standardizing processes and
developing tools. However, revenue growth results are taking more time to
show than our expectations. From being a hoped-for FY14 recovery story,
we think Wipro may be more a FY15 recovery story. We still think the
process is right and the results should follow the right process but we find it
difficult to put a time-line on the inflection point in Wipro’s performance.
What do we need to see in the Wipro recovery story for timing it? Evidence
of broad-based growth cutting across verticals and service-lines; likewise,
improved client mining ability through the broader client base and not just at the
few at the top (say, top-10 clients). Our revised Mar-14 PT on the stock is INR
400 (earlier INR465, INR415 adjusted for the non-IT business de-merger).
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10%+ returns over the next 9-12 months, but signals of a firmer recovery
to give sustained stock returns to justify OW remain elusive. Wipro
continues to struggle with its recovery and does not give any definitive signal(s)
that it is about to turn the corner in the next six months. The quarter came in
below the street’s expectations, rounding out FY13 with 5% revenue growth in
IT Services (or 7.4% growth in constant currency). However, what worried us a
bit more is the tepid revenue growth guidance for 1QFY14 (-0.6% to +1.6%
growth Q/Q), which means that recovery coming in time for a close-to-
Nasscom industry average growth in FY14 seems unlikely (say, within 100-200
bps of Nasscom’s growth range of 12-14%). We only partially agree with the
company’s explanation for its weak revenue 1QFY14 guidance (pointing to
a seasonally weaker June quarter for its India business). The fact is that
rather few verticals and service lines are performing well at the moment for
Wipro (energy & utilities, infra-management, analytics are among the few
bright spots) to be able to move the needle on a company of its size. Wipro
needs multiple growth engines to fire, which is not happening at the moment.
That said, we believe that Wipro is still doing most of the right things in
setting its house in order – be it (a) working on improving customer
satisfaction and employee satisfaction scores, (b) hiring a good team of
experienced hunters that can capably open doors, (c) working with a reasonably
successful methodology/architecture to improve traction with top-10 clients
(though progress in rolling this out to the broader client base is still elusive), (d)
moderating attrition (in this respect, it fares better than peer Infosys), (e)
improving win rates in deals and (f) credible initiatives at improving
productivity and increased automation through standardizing processes and
developing tools. However, revenue growth results are taking more time to
show than our expectations. From being a hoped-for FY14 recovery story,
we think Wipro may be more a FY15 recovery story. We still think the
process is right and the results should follow the right process but we find it
difficult to put a time-line on the inflection point in Wipro’s performance.
What do we need to see in the Wipro recovery story for timing it? Evidence
of broad-based growth cutting across verticals and service-lines; likewise,
improved client mining ability through the broader client base and not just at the
few at the top (say, top-10 clients). Our revised Mar-14 PT on the stock is INR
400 (earlier INR465, INR415 adjusted for the non-IT business de-merger).
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