Wipro - Company update - Poised to perform well - Angel Broking

We recently attended Wipro's analyst meet. The meet focused on the company's strategy to build differentiation in selected segments in various industry verticals and service lines. The company maintained that investments to develop domain capabilities are going on to help drive medium-term growth. The senior management team indicated that the demand scenario remains volatile due to uncertainty across the globe but outsourcing/offshoring as a means of driving productivity as well as cost benefits remains crucial to clients. We believe Wipro is poised to outperform some of its peer companies due to the following reasons:

Strategy - To focus upon chosen areas in industry verticals and services: Wipro has chosen its growth strategy to revolve around focusing on selected few segments in terms of industry verticals and services. The company has identified four momentum industry verticals: 1) BFSI, 2) energy and utilities, 3) retail and 4) lifesciences and healthcare. These verticals all-together account for 65% of the company's revenue. Wipro has higher exposure (as a proportion of revenue) as compared to its peers in three out of the above-mentioned four momentum verticals.

Optimal margin levers in hand: Wipro has operating margin levers such as improving utilization level and increasing offshore revenue. Wipro's utilization level is currently at 67.4%, which is at a historic low level since FY2008. The company has headroom to improve its utilization by ~300bp even if management does not want to run a tight ship. In addition, Wipro's share of offshore revenue declined to 45.6% due to SAIC's acquisition from 49% earlier (peers have offshore revenue above 50%). Increasing offshoring of revenue is on Wipro's cards right now and could offer a cushion to its margins.

Outlook and valuation: Wipro emphasized its focus on profitable growth and aspirations to close the gap in profitability with peers. Early signs of restructuring yielding results are visible in terms of improvement in the deal pipeline, growth seen in the company's focus industry verticals and increasing revenue from the company's top clients. We expect Wipro's revenue to post a CAGR of 13.7% over FY2012-14E, with EBITDA margin moving from 19.8% in FY2012 to 20.5% in FY2014. Over FY2012-14E, Wipro's net profit is expected to post a CAGR of 15.2%, which is industry leading. We upgrade the stock to Buy with a target price of Rs.452, valuing it at 15x FY2014E EPS of Rs.30.1.

Source : Equity Bulls

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