26 October 2010

Wipro Healthy volume, weak margin; downgrade to Hold:: Anand Rathi

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 Healthy volume; weak margin. Wipro’s reported 2QFY11 IT
Services revenue, which was up 5.7% qoq (in US dollar terms) on
6.6% volume growth. The operating margin, however, was down
193bp due to higher SG&A and restricted stock unit (RSU) costs.
Helped by lower tax expense, profit slipped only 1.5% qoq. We
retain our target price of `510; downgrade to Hold.
 Earnings guidance higher than peers’. Wipro guided for
3QFY11 revenue of US$1,320-1,340m, implying a 3.7-5.3% qoq
rise, in line with that of peer guidance.
 Revenue growth. IT Services revenue was up 4.8% in constant
currency terms. Onsite pricing was down 0.4% qoq, on constant
currency, while offshore pricing was down 0.9% qoq. The main
growth drivers were Retail & Transportation (8.7% qoq), Energy &
Utilities (5.7%), Europe (9%) and Emerging Markets (10.6%).
Contribution from fixed-price projects decreased 60bp qoq to 44%,
and the offshore share of revenue rose 50bp qoq to 48.3%.
 Change in estimate; introducing FY13 estimates. We retain
FY11e EPS and lower FY12e EPS by 3% on account of a lower
margin forecast. We expect about 16% volume growth, flat pricing,
10-bp margin expansion over FY12, and a 22% tax rate.
 Valuation and risks. We retain our target price of `510, which
implies a target multiple of 23x Sep ’11e EPS. (24x earlier). Risks:
i) Integration problems due to acquisitions ii) Slowdown in demand.


Revenue analysis
Wipro’s 2QFY11 revenue came in at `77.3bn, in line with our estimates.
The average rupee-dollar conversion for the quarter stood at 44.3 versus
our expectation of 46.5. In dollars, revenue was US$1,744m, up 12.6%
sequentially, beating our estimates by 1.2%.
 IT Services’ revenue fell 2.9% short of our expectation (rupee terms);
Consumer-care stood 3.1% lower than expectations. However,
revenue from IT Products, at 21.2%, surpassed our estimate.
 IT Services’ volumes rose 6.6% qoq (on-site: 4.4%; offshore: 7.4%),
against our estimate of 5.4% blended volume increase. Pricing was flat
qoq vis-à-vis our expectation of pricing inching up 0.3%.
 The average rupee-dollar rate realised for IT services in 2QFY11 was
45.15.
EBITDA margin
EBITDA margin was 129bp below our expectations owing to higher-thanexpected
cost of revenues and SG&A costs, and RSU costs.
Non-operating items
Other income – ‘Other income’ was higher our estimate.
Effective tax rate – The tax rate was 14.6%, far short of our estimate of
17%.
Dilution – ESOP conversion was in line with estimate.
Net profit growth
Net profit was lower than our estimates by 1.5%. It was helped, however,
by non-operational items such as higher-than-expected ‘other income’ and
lower tax expense.

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