Wipro Ltd.
Bracing for tough times
REDUCE
CMP: Rs 207 Target Price: Rs 220
Revenue headwinds stronger than peers- Lower client mining V/s peers, historical underinvestment in account mining will come to the fore
Wipro's superior performance in financial services set to end
Margin defense through INR depreciation/lower headcount addition would be at risk from volumes/demand risk.
Indications of lower dividend payout/ discontinuing quarterly guidance testimony to co's lack of visibility.
Valuations cheap, but so are for the sector as well.
Introduce 'REDUCE' rating with a price target of Rs 220.
We introduce coverage on Wipro Technologies with a REDUCE rating and a price target of Rs 220. Though valuations at ~9x FY10E earnings of Rs 23.1 appear undemanding, Wipro runs the highest risk of disappointment in our view (we expect consensus earnings downgrades, our US GAAP FY10E earnings at Rs 23.1, are already 7% lower than consensus). Further we believe that Wipro faces stiff growth challenges than other Tier 1 peers given (1) lower client mining (underinvestment in account management, although has undertaken some remedial measures over the past few quarters) and (2) more pressures emerging from financial services where it has displayed resilience over the past few quarters vis-à-vis other Tier 1 peers. Although hiring has remained in check at Wipro in FY09 (in line with demand weakness unlike peers Infy and TCS who have hired aggressively during the year) and should help alleviate some pressure off margins, we believe that volume/pricing pressures would still keep margins down. Wipro management's indications of discontinuing the practice of giving quarterly revenue guidance combined with co's plans of lowering dividend payout going ahead (Rs 6/share each over the past 2 years) will dampen investor confidence further. In our opinion Wipro would fare worse than other Tier 1 peers in the tough macro environment and thus expect it to under perform sector/other Tier 1 peers.
Revenue headwinds stiffer than other Tier 1 peers
In our opinion, Wipro faces more challenges as compared with other Tier 1 peers in a tough macro environment driven by a long duration of underinvestment in relationship management (albeit some corrective measures have been taken in the recent past) which would impact Wipro negatively especially in vendor consolidation exercises. To add to Wipro's woes we believe that the strong show in financial services space could be halted (Wipro's metrics have been immune to the financial services pressure until Dec'08 quarter as compared with peers which started reflecting weakness much earlier, please refer ' Immune to Financial Services weakness until now'). Further we believe Wipro's lack of visibility is explained in it's circumspect commentary in the recent months with co looking to discontinue the practice of quarterly revenue guidance as well as reducing dividend payout( ~30% over the past 2 financial years)
Margins defense could be limited
Wipro could not reap in the benefits of ~25% INR depreciation during FY09 on account of large amount of hedging positions at higher US$/INR rate ( Wipro's IT services EBIT margins during Q3FY09 were up by ~110 bps YoY, pale as compared to Infy's margin expansion of ~250 bps YoY). For FY10, Wipro's forward hedge covers would be realized between Rs 45-48 which would perk up the average realization rate. Further Wipro's hiring during FY09 has remained muted which would augur well in tough demand environment. However we are of the view that margin upsides could be limited despite the advantage of higher realization rate and employee costs on account of volume/pricing pressures.
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