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Revival to be slower than Street expectations
Recent outperformance builds
high hopes of a speedy revival;
unlikely in our view
Action: Speed of revival likely to disappoint; Reaffirm Neutral
Wipro has been the best performing Tier-1 IT stock (22% outperformance
vs. the Nifty) over the past three months, driven by market expectations of
a speedy revival in revenue growth. However, we believe the Street might
be disappointed on this front with Wipro likely to continue losing market
share vs. peers and lagging in earnings growth over the next two years.
This, coupled with 1) higher-than-peer group margin declines over FY11-
13F and 2) no immediate improvement in ROCE/working capital
deterioration trends, could lead to valuations staying depressed in our
view. Reaffirm Neutral.
Catalyst: Pricing pressure and continued loss of market share
Wipro’s early revival hopes premature, in our view
We remain non-consensus in our view that revival signs are yet to emerge
definitively with 1) continued growth issues in the US (two consecutive
quarters of declines on an organic basis) 2) loss of growth momentum
might be difficult to arrest without being disruptive on pricing/increasing
investments in sales/ acquisitions, which could lead to P&L or balance
sheet deterioration 3) operational scope might not be utilised as the
company builds buffer for growth – exerting pressure on margins. We
believe near-term results might not underpin revival hopes.
Valuation: Raise TP to INR390 (from INR350) on INR assumption
We remain Neutral on Wipro with a new TP of INR390, based on 14x 1-yr
forward earnings (20% discount to TCS/Infosys) on earnings lag and
inferior return ratios. Our TP change is driven by our INR assumption
changes and rolling-forward of earnings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Revival to be slower than Street expectations
Recent outperformance builds
high hopes of a speedy revival;
unlikely in our view
Action: Speed of revival likely to disappoint; Reaffirm Neutral
Wipro has been the best performing Tier-1 IT stock (22% outperformance
vs. the Nifty) over the past three months, driven by market expectations of
a speedy revival in revenue growth. However, we believe the Street might
be disappointed on this front with Wipro likely to continue losing market
share vs. peers and lagging in earnings growth over the next two years.
This, coupled with 1) higher-than-peer group margin declines over FY11-
13F and 2) no immediate improvement in ROCE/working capital
deterioration trends, could lead to valuations staying depressed in our
view. Reaffirm Neutral.
Catalyst: Pricing pressure and continued loss of market share
Wipro’s early revival hopes premature, in our view
We remain non-consensus in our view that revival signs are yet to emerge
definitively with 1) continued growth issues in the US (two consecutive
quarters of declines on an organic basis) 2) loss of growth momentum
might be difficult to arrest without being disruptive on pricing/increasing
investments in sales/ acquisitions, which could lead to P&L or balance
sheet deterioration 3) operational scope might not be utilised as the
company builds buffer for growth – exerting pressure on margins. We
believe near-term results might not underpin revival hopes.
Valuation: Raise TP to INR390 (from INR350) on INR assumption
We remain Neutral on Wipro with a new TP of INR390, based on 14x 1-yr
forward earnings (20% discount to TCS/Infosys) on earnings lag and
inferior return ratios. Our TP change is driven by our INR assumption
changes and rolling-forward of earnings.
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