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Wipro (WPRO)
Technology
The wait could get longer. Wipro reported poor quarter with revenue growth and
operational metrics missing our estimate. Revenue growth guidance for 2QFY12E is
muted and below our estimate. Benefits of management change and new organization
are taking longer than expected, in our view. We cut our EPS by 5.4% and 4.3% to
Rs22.9 and Rs26.3 for FY2012E and FY2013E, respectively. Inexpensive valuation is the
only saving grace. Maintain ADD rating but cut target price to Rs450 (Rs525 earlier).
Weak all-round performance
Wipro reported weak quarterly performance with IT services revenues of US$1,408 mn, 1.2%
below our estimate. Revenues declined 0.2% to US$1,398 mn in IT services excluding impact of
acquisition. Net income of Rs13.4 bn was 4% ahead of our estimate and helped by (1) increase in
Re/US$ realization courtesy good timing on hedges; and (2) increase in yield on treasury
operations. Free cash generation was negligible for the quarter; DSO increased by 9 days qoq.
Operating metrics were poor (1) revenues declined sequentially across most verticals/ horizontals;
(2) pricing declined 0.9% onsite and 0.4% offshore; (3) attrition rate increased to 25% (qtr
annualized) for IT services; increase is understandable and common after large reorganization and
(4) modest recruitment of 2,800 excluding acquisition of SAIC’s Oil and Gas business.
Guidance for 2QFY12E weak and reflects delay in benefits of reorganization
Wipro has guided for global IT services revenues of US$1,436-1,464 mn for 2QFY12E; guidance
builds in incremental US$30 mn from full quarter SAIC O&G consolidation. Organic revenue
growth guidance is a modest 0-2%. We are a bit surprised with muted revenue growth guidance,
especially against the backdrop of strong deal wins and improving order book. Perhaps, revenue
growth will likely show a steady improvement as the company derives benefits of a simpler
organization structure and greater aggression on large transformation deals.
ADD maintained on inexpensive valuations; earnings and target price cut
We cut our EPS estimates for FY2012E and FY2013E by 5% and 4% to Rs22.9 and Rs26.3,
respectively. We also lower US$ revenue estimates by 4-5%. Positive view on Wipro (besides
valuation argument) hinges on catch-up on revenue growth with peers. This, in our view, can
happen in FY2013E at the earliest. Management guidance on strong deal pipeline in momentum
verticals, improving client engagement model and stabilization of the new organization structure
are good building blocks and lays a reasonable platform for growth. We refrain from building
better-than-peer revenue growth for FY2012E and FY2013E but find comfort in inexpensive
valuation of 17.5X FY2012E and 15.2X FY2013E earnings. We cut our TP to Rs450, valuing the
company at 17X FY2013E earnings.
1QFY12 highlights
IT services business of Wipro reported revenues of US$1,408 mn (+ 0.5% qoq, 17% yoy),
1.2% lower than our estimate. Revenues include US$10 mn from acquisition of SAIC’s Oil
and Gas practice.
Utilities vertical was the only bright spot and grew 7.5% excluding SAIC acquisition and
14.3% including acquisition.
Billing rates declined 0.9% onsite and 0.4% offshore. The company attributed the decline
to seasonality and completion of certain high-yield fixed price projects.
Operating margin in IT services business was flat in 1QFY12 despite impact of wage
revision for about a month in the quarter and pricing headwind. Headwinds were offset
by smart hedging decisions that enabled the company to realize a Re/US$ rate of 45.5
versus the US$ versus spot average of 44.75 for 1QFY12.
Client metrics showed marginal improvement. Number of US$100 mn clients increased by
1, while average revenues from top-10 clients stayed above US$100 mn. This sustains the
good increase shown by the company in 4QFY11. Perhaps, focused account management
strategy is finally delivering results.
Free cash generation at US$30 mn was insignificant when compared to net income. DSOs
(consolidated, including unbilled revenues) increased significantly to 102 days from 93
days in the previous quarter.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro (WPRO)
Technology
The wait could get longer. Wipro reported poor quarter with revenue growth and
operational metrics missing our estimate. Revenue growth guidance for 2QFY12E is
muted and below our estimate. Benefits of management change and new organization
are taking longer than expected, in our view. We cut our EPS by 5.4% and 4.3% to
Rs22.9 and Rs26.3 for FY2012E and FY2013E, respectively. Inexpensive valuation is the
only saving grace. Maintain ADD rating but cut target price to Rs450 (Rs525 earlier).
Weak all-round performance
Wipro reported weak quarterly performance with IT services revenues of US$1,408 mn, 1.2%
below our estimate. Revenues declined 0.2% to US$1,398 mn in IT services excluding impact of
acquisition. Net income of Rs13.4 bn was 4% ahead of our estimate and helped by (1) increase in
Re/US$ realization courtesy good timing on hedges; and (2) increase in yield on treasury
operations. Free cash generation was negligible for the quarter; DSO increased by 9 days qoq.
Operating metrics were poor (1) revenues declined sequentially across most verticals/ horizontals;
(2) pricing declined 0.9% onsite and 0.4% offshore; (3) attrition rate increased to 25% (qtr
annualized) for IT services; increase is understandable and common after large reorganization and
(4) modest recruitment of 2,800 excluding acquisition of SAIC’s Oil and Gas business.
Guidance for 2QFY12E weak and reflects delay in benefits of reorganization
Wipro has guided for global IT services revenues of US$1,436-1,464 mn for 2QFY12E; guidance
builds in incremental US$30 mn from full quarter SAIC O&G consolidation. Organic revenue
growth guidance is a modest 0-2%. We are a bit surprised with muted revenue growth guidance,
especially against the backdrop of strong deal wins and improving order book. Perhaps, revenue
growth will likely show a steady improvement as the company derives benefits of a simpler
organization structure and greater aggression on large transformation deals.
ADD maintained on inexpensive valuations; earnings and target price cut
We cut our EPS estimates for FY2012E and FY2013E by 5% and 4% to Rs22.9 and Rs26.3,
respectively. We also lower US$ revenue estimates by 4-5%. Positive view on Wipro (besides
valuation argument) hinges on catch-up on revenue growth with peers. This, in our view, can
happen in FY2013E at the earliest. Management guidance on strong deal pipeline in momentum
verticals, improving client engagement model and stabilization of the new organization structure
are good building blocks and lays a reasonable platform for growth. We refrain from building
better-than-peer revenue growth for FY2012E and FY2013E but find comfort in inexpensive
valuation of 17.5X FY2012E and 15.2X FY2013E earnings. We cut our TP to Rs450, valuing the
company at 17X FY2013E earnings.
1QFY12 highlights
IT services business of Wipro reported revenues of US$1,408 mn (+ 0.5% qoq, 17% yoy),
1.2% lower than our estimate. Revenues include US$10 mn from acquisition of SAIC’s Oil
and Gas practice.
Utilities vertical was the only bright spot and grew 7.5% excluding SAIC acquisition and
14.3% including acquisition.
Billing rates declined 0.9% onsite and 0.4% offshore. The company attributed the decline
to seasonality and completion of certain high-yield fixed price projects.
Operating margin in IT services business was flat in 1QFY12 despite impact of wage
revision for about a month in the quarter and pricing headwind. Headwinds were offset
by smart hedging decisions that enabled the company to realize a Re/US$ rate of 45.5
versus the US$ versus spot average of 44.75 for 1QFY12.
Client metrics showed marginal improvement. Number of US$100 mn clients increased by
1, while average revenues from top-10 clients stayed above US$100 mn. This sustains the
good increase shown by the company in 4QFY11. Perhaps, focused account management
strategy is finally delivering results.
Free cash generation at US$30 mn was insignificant when compared to net income. DSOs
(consolidated, including unbilled revenues) increased significantly to 102 days from 93
days in the previous quarter.
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