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Wipro (WPRO)
Technology
Mixed bag – volumes beat, margins and cash flows disappoint. Wipro’s 2QFY12
earnings report threw a mixed set of numbers – revenue growth beat expectations on
strong volume uptick but margin decline and poor cash-flow generation disappointed.
Wipro’s turnaround (which aims at bridging relative performance gap versus peers)
remains a work in progress – mixed 2Q report does little to aid a decisive verdict.
Nonetheless, FY2013E EPS sees a currency-led upgrade while valuation support
prevents a downgrade. Maintain ADD. Revise TP to Rs410 (from Rs370 earlier).
2QFY12 earnings a mixed bag – volume beat negated by margin miss and poor cash flows
Wipro beat the upper-end of its revenue guidance for the first time in many quarters. Reported IT
services revenues of US$1,473 mn (+4.6% qoq, +15.7% yoy) came in 1% ahead of our
expectations and 1.5% above the upper-end of company’s constant currency revenue guidance.
Revenue growth was driven by a strong 6% volume growth even as reported offshore pricing was
down 4.1% qoq on account of effort overflow in certain fixed price contracts (this may have aided
volume growth to some extent as well). Revenue growth was aided to an extent of 2.5% from full
quarter consolidation of SAIC; organic revenue growth was 2.1% qoq (2.9% in constant currency).
IT services EBIT margins declined 200 bps qoq versus our expectation of 130 bps; margin decline
was driven by (1) full quarter impact of wage hikes effected from June 1, 2011, and (2) acquisition
consolidation impact. We were also disappointed by poor cash-flow generation during the quarter
– Wipro has seen sustained balance sheet deterioration for the past few quarters. At a
consolidated level, DSO (including unbilled) has expanded to 107 days from a low of 81 days as
late as Sep 2009; working capital cycle has increased to 77 days from 29 in the same timeframe.
True turnaround demands bridging revenue growth gap without margin or ROCE sacrifices
Wipro faces a tough challenge turning around its revenue performance relative to peers, in our
view. Even as the company has taken aggressive personnel decisions and made changes to the
organization structure, turnaround in revenue growth trajectory faces challenges from (1) potential
demand softening, and (2) increased aggression from competitors. More importantly, revenue
turnaround needs to be delivered without a structural hit on margin profile. Also, Wipro needs to
meet the P&L turnaround challenge while keeping an eye on the balance sheet and return ratios –
both of these have weakened meaningfully in recent quarters.
We do like Wipro’s vertical-centric, client-mining-focused turnaround strategy, however. The
company may not be able to deliver a perfect quarter during the turnaround phase. However,
valuations at 13.8X our revised FY2013E EPS (16% discount to Infosys) do not demand a perfect
quarter, either. We retain ADD. Our TP stands revised to Rs410/share (from 370 earlier).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro (WPRO)
Technology
Mixed bag – volumes beat, margins and cash flows disappoint. Wipro’s 2QFY12
earnings report threw a mixed set of numbers – revenue growth beat expectations on
strong volume uptick but margin decline and poor cash-flow generation disappointed.
Wipro’s turnaround (which aims at bridging relative performance gap versus peers)
remains a work in progress – mixed 2Q report does little to aid a decisive verdict.
Nonetheless, FY2013E EPS sees a currency-led upgrade while valuation support
prevents a downgrade. Maintain ADD. Revise TP to Rs410 (from Rs370 earlier).
2QFY12 earnings a mixed bag – volume beat negated by margin miss and poor cash flows
Wipro beat the upper-end of its revenue guidance for the first time in many quarters. Reported IT
services revenues of US$1,473 mn (+4.6% qoq, +15.7% yoy) came in 1% ahead of our
expectations and 1.5% above the upper-end of company’s constant currency revenue guidance.
Revenue growth was driven by a strong 6% volume growth even as reported offshore pricing was
down 4.1% qoq on account of effort overflow in certain fixed price contracts (this may have aided
volume growth to some extent as well). Revenue growth was aided to an extent of 2.5% from full
quarter consolidation of SAIC; organic revenue growth was 2.1% qoq (2.9% in constant currency).
IT services EBIT margins declined 200 bps qoq versus our expectation of 130 bps; margin decline
was driven by (1) full quarter impact of wage hikes effected from June 1, 2011, and (2) acquisition
consolidation impact. We were also disappointed by poor cash-flow generation during the quarter
– Wipro has seen sustained balance sheet deterioration for the past few quarters. At a
consolidated level, DSO (including unbilled) has expanded to 107 days from a low of 81 days as
late as Sep 2009; working capital cycle has increased to 77 days from 29 in the same timeframe.
True turnaround demands bridging revenue growth gap without margin or ROCE sacrifices
Wipro faces a tough challenge turning around its revenue performance relative to peers, in our
view. Even as the company has taken aggressive personnel decisions and made changes to the
organization structure, turnaround in revenue growth trajectory faces challenges from (1) potential
demand softening, and (2) increased aggression from competitors. More importantly, revenue
turnaround needs to be delivered without a structural hit on margin profile. Also, Wipro needs to
meet the P&L turnaround challenge while keeping an eye on the balance sheet and return ratios –
both of these have weakened meaningfully in recent quarters.
We do like Wipro’s vertical-centric, client-mining-focused turnaround strategy, however. The
company may not be able to deliver a perfect quarter during the turnaround phase. However,
valuations at 13.8X our revised FY2013E EPS (16% discount to Infosys) do not demand a perfect
quarter, either. We retain ADD. Our TP stands revised to Rs410/share (from 370 earlier).
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