Wipro- Growth pushed out to FY13 ::Macquarie Research

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Wipro
Growth pushed out to FY13
Event
 We downgrade Wipro to Neutral from Outperform as we expect the growth
turnaround at the company to be pushed out to FY13. Management
mentioned on the earnings call that their deal pipeline is seeing the traction of
organisational restructuring. Even so, we recommend investors to wait out the
period as we expect the next two-three quarters performance would continue
to lag peers. The stock would remain range bound till the quarterly financial
performance start reflecting the work of new management team, in our view.
Impact
 Growth profile not exciting enough. After factoring in 2Q revenues at the
high-end of the guidance Wipro would need to do a CQGR of 5.7% in 3Q and
4Q to reach low end of industry growth of 16% for full year FY12. We believe
this would be tough as sales traction from organisational restructuring would
take longer. Our revised FY12 revenue growth est. is 15% vs. 19% earlier.
 Multiple margin headwinds in 2Q. The only positive surprise in the quarterly
performance for us was the steady margin performance. The company faces
two headwinds on this count: (1) Full quarter impact of wage hikes that were
given in June, (2) SAIC contribution would pull margins down. Lower growth
vs. peers would also handicap Wipro’s performance to fight margin headwinds
from potential currency appreciation.
 Deal funnel better but translation into quarterly performance still away.
Wipro announced two new deals in the BFSI segment worth over US$500m.
The company was confident that its deal pipeline is healthy and we would see
the financial performance come through in 2-3 quarters. We recognise that
the company has the potential to beat average industry growth but the target
PER multiple would suffer given uncertain growth profile.
Earnings and target price revision
 We have scaled back our FY12 US$ revenue growth estimate to 15% from
19% earlier. Our revised FY12/FY13 EPS is now lower by 3%/6%. Our new
PER based target price is Rs425 (20% discount to target FY13 PER multiple
for TCS) vs Rs540 earlier. This is justified given the stark contrast in earnings
growth expectations of 7.5% for Wipro vs. 20% at TCS over FY11-13E.
Price catalyst
 12-month price target: Rs425.00 based on a PER methodology.
 Catalyst: Revenue growth and large deal announcements
Action and recommendation
 Restructuring benefits to take time to trickle down. We had earlier
expected Wipro to return back to industry average growth by 2H FY12. We
now expect that to take longer than anticipated. The company might struggle
to achieve average industry growth for FY12, in our view. Our preference in
the space remain TCS and HCLT.