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UBS Investment Research
Wipro Ltd.
Slowdown could impede turnaround
[ EXTRACT]
Restructuring complete, but revenue acceleration yet to be seen
Wipro has undergone extensive restructuring by creating vertically aligned
business units and increasing investment in its sales and marketing team. However,
the revenue impact of this restructuring is yet to be seen. Weak Q2 FY12 revenue
guidance of 2-4% QoQ growth has also failed to impress investors.
Slowdown in demand likely to impede the revenue turnaround
We expect the slowdown in IT spending to impact the revenue turnaround for
Wipro. We revise our FY12/13/14 EPS estimates from Rs22.66/26.03/29.71 to
Rs22.79/25.26/27.96 to reflect the slower recovery in revenue and its impact on
earnings.
Margins likely to be impacted due to slower growth
We expect Wipro to step up its hiring activities when growth returns, which could
potentially impact margins due to higher training expenses and wage costs. We
expect Wipro’s IT services operating margin to decline from 22.7% in FY11 to
21.5% in FY12 due to higher employee costs. Currency movements remain the key
risk to our operating margin estimates.
Valuation: maintain Sell rating, lower price target from Rs410 to Rs340
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool, assuming a 12.4% WACC,
and 3% terminal growth. Our price target implies a one-year forward PE multiple
of 14.3x, factoring in our expected slower growth momentum.
Wipro Ltd.
Wipro is the third largest IT services company in India with IT services
revenues of US$4.4bn and around 110,000 employees in FY10. Its main
verticals are telecoms, media and technology (26% of revenues), financial
services (26% of revenues), and manufacturing (15% of revenues). Wipro has a
diversified service offering in applications development and maintenance,
testing, package implementation, infrastructure services, and BPO. Wipro
derives 58% revenue from the US, 26% from Europe, and the rest from India
and other emerging markets.
Statement of Risk
In our view, a weak demand environment, and continued supply side pressures
(wage hikes) remain the key risks to our earnings estimates. Appreciation of the
Indian rupee against major global currencies could also impact profitability for
the company.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Wipro Ltd.
Slowdown could impede turnaround
[ EXTRACT]
Restructuring complete, but revenue acceleration yet to be seen
Wipro has undergone extensive restructuring by creating vertically aligned
business units and increasing investment in its sales and marketing team. However,
the revenue impact of this restructuring is yet to be seen. Weak Q2 FY12 revenue
guidance of 2-4% QoQ growth has also failed to impress investors.
Slowdown in demand likely to impede the revenue turnaround
We expect the slowdown in IT spending to impact the revenue turnaround for
Wipro. We revise our FY12/13/14 EPS estimates from Rs22.66/26.03/29.71 to
Rs22.79/25.26/27.96 to reflect the slower recovery in revenue and its impact on
earnings.
Margins likely to be impacted due to slower growth
We expect Wipro to step up its hiring activities when growth returns, which could
potentially impact margins due to higher training expenses and wage costs. We
expect Wipro’s IT services operating margin to decline from 22.7% in FY11 to
21.5% in FY12 due to higher employee costs. Currency movements remain the key
risk to our operating margin estimates.
Valuation: maintain Sell rating, lower price target from Rs410 to Rs340
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool, assuming a 12.4% WACC,
and 3% terminal growth. Our price target implies a one-year forward PE multiple
of 14.3x, factoring in our expected slower growth momentum.
Wipro Ltd.
Wipro is the third largest IT services company in India with IT services
revenues of US$4.4bn and around 110,000 employees in FY10. Its main
verticals are telecoms, media and technology (26% of revenues), financial
services (26% of revenues), and manufacturing (15% of revenues). Wipro has a
diversified service offering in applications development and maintenance,
testing, package implementation, infrastructure services, and BPO. Wipro
derives 58% revenue from the US, 26% from Europe, and the rest from India
and other emerging markets.
Statement of Risk
In our view, a weak demand environment, and continued supply side pressures
(wage hikes) remain the key risks to our earnings estimates. Appreciation of the
Indian rupee against major global currencies could also impact profitability for
the company.
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