Stock Market Update on Wipro for 1QFY2012

Stock Market Update on Wipro for 1QFY2012 with an Accumulate recommendation and a Target Price of `419 (12 months)

   For 1QFY2012, Wipro reported lower-than-expected results. The major disappointment came from the price realisations front, which declined by 1.7% and 1.2% qoq for onsite as well as offshore in constant currency (CC) terms, respectively. During 1QFY2012, Wipro’s IT services revenue came in at US$1.408bn, while Cognizant has given a revenue guidance of at least US$1.45bn for the quarter (results not yet out), which (if achieved) makes Cognizant the third largest Indian IT player. Revenue guidance for Wipro’s IT services segment for 2QFY2012 looks lacklustre at US$1.436bn–1.464bn, only 2–4% qoq growth, as 2Q is seasonally the strongest quarter for IT companies. Wipro continues to lag its peers and is undergoing new organisational restructuring at the top end. Thus, we expect volumes to remain tepid. Accordingly, we downgrade our recommendation to Accumulate from Buy.

Quarterly highlights: For 1QFY2012, Wipro registered 3.1% qoq growth in revenue to `8,564cr. Volume growth of the IT services segment came in tepid at 1.8% qoq. Revenue from IT products and consumer care and lightening segments grew strongly by 20.9% and 17.6% yoy, respectively. EBIT margin of the IT services and consumer care and lightening segments fell by 10bp and 22bp qoq to 22.0% and 11.9%, respectively; while for IT products, EBIT margin increased by 56bp qoq to 4.2%. Overall EBIT margin declined by 35bp qoq to 17.5%.

Outlook and valuation: In FY2011, Wipro added incremental revenue of only US$830mn vis-à-vis Infosys, TCS and Cognizant (in CY2010) adding US$1.23bn, US$1.83bn and US$1.31bn, respectively. Further, management guided for revenue growth of only 2–4% qoq for 2QFY2012. Management maintained that it will take another 2–3 quarters to grow at rates comparable to its peers. Thus, we expect revenue CAGR for IT services (US$ terms) to be muted at 15% (17.4% earlier) over FY2011–13E, underperforming not only tier-I companies but also tier-II companies such as KPIT, Persistent and Hexaware. We value Wipro at 16x FY2013E EPS of `26.2 and downgrade our rating to Accumulate from Buy with a target price of `419.