Wipro - Tries to catch up to peer growth:: Emkay

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Wipro Ltd

Tries to catch up to peer growth

REDUCE

CMP: Rs 418                                       Target Price: Rs 420

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n     Positive commentary on demand, expects CY11 budgets to be up by ~2-4%. Expects continuation of strong revenue traction in Europe (as in Sep’10 qtr) for the sector

n     Wipro attempts to get it’s act together to cut revenue underperformance V/s peers (we believe it’s ‘WIP’). See downside risks to mgns driven by cost pressures/ lower rev growth

n     Valuation discount to peers appears justified given lower than peer growth and margin headwinds ahead. Retain REDUCE with a price target of Rs 420

Course correction to catch up to peer growth

Wipro has trailed peers on revenue growth since FY04 albeit for FY09 on account of it’s

inherent inability to drive aggressive client mining within Fortune 500 clients despite

having all the needed ingredients in the form of scale, competitive/delivery capabilities.

Having done a creditable job through the downturn in CY08/early CY09, Wipro’s growth

has once again been trailing Tier 1 peers (appears more magnified in Sep’10 qtr where

both TCS / Infy posted double digit QoQ growth) on as Wipro’s inherent client mining

woes resurface. Though not in complete disagreement on a ‘relatively anemic

client mining’ result, per co, it underestimated the strength of demand momentum

in early CY10 and thus missed out to peers on taking over ‘short term tactical’

projects which have driven follow through revenues for competition. Additionally

in our view, Wipro ran tight ship/high utilization and ran a lower bench V/s peers

(driving good margin show during CY09, however backfired as volumes picked up

in CY10, refer table below). Wipro now intends to take all the necessary steps to align

demand est. with delivery preparedness which in co’s view should help undercut

revenue underperformance vis-à-vis peers. We continue to build in 17.5% revenue

CAGR over FY10-13E for Wipro (V/s ~ 22% for Infy and TCS)

Strong growth in Europe should continue for Tier 1’s in the near term

Sep’10 qtr saw Europe joining the party with Tier 1’s reporting QoQ double digit revenue

growth and our discussions with co mgmt indicate that Europe could continue (from both

improved success in Continental Europe both on account of a renewed urgency on part

of European clients to embrace outsourcing/off shoring in an attempt to rationalize costs

as well as success with the sales and marketing investments made by the companies in

the past 4-6 quarters) driven by ramp ups in new client logos won by Indian techs in the

past few quarters with an increase in number of transformational deals.

Valuation discount to peers reasonable in view of below peer growth

Wipro trades at ~11%/17% discount to Infosys and TCS on FY12E earnings which in

our view is justified given (1) Wipro’s underperformance on revenue growth, (2) margin

headwinds (little scope to improve utilization levels with strong headwinds from wage

pressures and currency). We believe a catch up to peer growth needs to preclude the

cut in valuation gap to peers. REDUCE with a price target of Rs 420.