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Wipro Ltd.
Overweight
WIPR.BO, WPRO IN
Keep the faith and patience; stronger FY13 holds the
key to re-rating and stock upside; maintain OW
• Wipro’s 4QFY11 results will have more skeptics than believers: The reason
is tepid guidance for IT Services revenues for 1QFY12 (-0.5% to 1.5%) in a
good environment – we believe this reflects a pause during this period of
restructuring that Wipro has substantially undergone after a change in
leadership. With this guidance, we reckon that Wipro has almost ceded its No. 3
status in revenue league tables (Indian IT) to Cognizant.
• We remain a believer in the Wipro story but change will not come
overnight: The right changes have been made and swiftly at that. Account
management models have been recalibrated using single point centres of
accountability with support of solution specialists to manage clients. However,
it will take time for the changes to reflect a better trajectory of sequential
(quarterly) growth. We expect that the turnaround will start showing in
2QFY12, more substantially from 3QFY12 onwards. Thus, from an annual
perspective, we think Wipro is more of a FY13 story than a FY12 story. As
the company refocuses its areas of investments and adopts a more customercentric
structure, near-term margins of IT-Services may not necessarily paint a
good picture of the likely revenue/margin profile for FY13. We believe
investors need to look beyond margins over the next 2-3 quarters (provided they
remain in a narrow range of 22% EBIT, which we believe will be the case).
• Likely to substantially underperform peers on growth in FY12 as well: We
believe that TCS/Infosys will continue to significantly outperform Wipro on
revenue growth in FY12 (TCS by more than 10% points). This
underperformance follows on from FY11. FY13 should be the year of catch-up.
• The quarter (4QFY11) is in line: Wipro reported 4.2% Q/Q US$ IT revenue
growth and 5.8% increase in consolidated revenues (INR). IT revenues grew
3.5% Q/Q in constant currency terms, within the 3%-5% guidance range.
• EBIT margins in FY12 could decline (versus in FY11): This is because core
organic growth may not be strong enough to provide leverage. For the quarter,
however, EBIT margins for IT services business are in line with our
expectations at 22.1%, which are about flat sequentially, partly aided by
currency. Hence, margin contraction on a consolidated basis was driven by non-
IT businesses. EPS of Rs5.6 are in line with our expectations, as lower-thanexpected
EBIT (due to lower margins) was offset by slightly higher-thanexpected
interest income.
• Maintain OW but keep a 12-month view for 20% upside potential: We
believe until the market sees evidence of an uptick of the growth trajectory, the
stock is likely to be range-bound, reasonable valuations notwithstanding. We
retain our OW rating with a Mar-12 PT of Rs540. This embeds a 15% discount
on FY13E P/E to that of TCS.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Wipro Ltd.
Overweight
WIPR.BO, WPRO IN
Keep the faith and patience; stronger FY13 holds the
key to re-rating and stock upside; maintain OW
• Wipro’s 4QFY11 results will have more skeptics than believers: The reason
is tepid guidance for IT Services revenues for 1QFY12 (-0.5% to 1.5%) in a
good environment – we believe this reflects a pause during this period of
restructuring that Wipro has substantially undergone after a change in
leadership. With this guidance, we reckon that Wipro has almost ceded its No. 3
status in revenue league tables (Indian IT) to Cognizant.
• We remain a believer in the Wipro story but change will not come
overnight: The right changes have been made and swiftly at that. Account
management models have been recalibrated using single point centres of
accountability with support of solution specialists to manage clients. However,
it will take time for the changes to reflect a better trajectory of sequential
(quarterly) growth. We expect that the turnaround will start showing in
2QFY12, more substantially from 3QFY12 onwards. Thus, from an annual
perspective, we think Wipro is more of a FY13 story than a FY12 story. As
the company refocuses its areas of investments and adopts a more customercentric
structure, near-term margins of IT-Services may not necessarily paint a
good picture of the likely revenue/margin profile for FY13. We believe
investors need to look beyond margins over the next 2-3 quarters (provided they
remain in a narrow range of 22% EBIT, which we believe will be the case).
• Likely to substantially underperform peers on growth in FY12 as well: We
believe that TCS/Infosys will continue to significantly outperform Wipro on
revenue growth in FY12 (TCS by more than 10% points). This
underperformance follows on from FY11. FY13 should be the year of catch-up.
• The quarter (4QFY11) is in line: Wipro reported 4.2% Q/Q US$ IT revenue
growth and 5.8% increase in consolidated revenues (INR). IT revenues grew
3.5% Q/Q in constant currency terms, within the 3%-5% guidance range.
• EBIT margins in FY12 could decline (versus in FY11): This is because core
organic growth may not be strong enough to provide leverage. For the quarter,
however, EBIT margins for IT services business are in line with our
expectations at 22.1%, which are about flat sequentially, partly aided by
currency. Hence, margin contraction on a consolidated basis was driven by non-
IT businesses. EPS of Rs5.6 are in line with our expectations, as lower-thanexpected
EBIT (due to lower margins) was offset by slightly higher-thanexpected
interest income.
• Maintain OW but keep a 12-month view for 20% upside potential: We
believe until the market sees evidence of an uptick of the growth trajectory, the
stock is likely to be range-bound, reasonable valuations notwithstanding. We
retain our OW rating with a Mar-12 PT of Rs540. This embeds a 15% discount
on FY13E P/E to that of TCS.
