Wipro - Restructuring pain to continue... - ICICIDirect

Q1FY13 revenues declined 1.4% QoQ to $1514.8 million and were below our $1542.6 million estimate (0.5% QoQ growth). Constant currency revenue growth of 0.3% QoQ was not encouraging. Volumes grew 0.5% QoQ while onsite/offshore pricing declined 0.9%/2%, respectively. Wipro results were generally uninspiring led by moderate volume growth and weak pricing. We believe industry pricing dynamics are changing and may continue to be a challenge for most firms led by competition, weakness in discretionary spending, uncertainty in the US & BFSI vertical.

Margins, profits below estimates

Despite ~11% depreciation in the realised rupee rate, EBIT margins increased a modest 30 bps QoQ to 21% and were below our 21.9% estimate. Margin headwinds from wage inflation effective June 1 (- 120 bps), S&M investments and offshore pricing (-150 bps) were offset by rupee depreciation (up 300 bps). At | 1580 crore, net profit was lower than our | 1695 crore estimate led by lower margins relative to our estimate.

ADM, consulting, telecom, BFSI & US drag quarterly performance

BFSI (26.4% of Q1 revenues) declined 0.6% QoQ in constant currency while retail (15%) declined 2.2% QoQ. Manufacturing, telecom & energy verticals were also tepid and grew 1.5%, 2% & 1%, respectively. Americas (51.6%) declined 2.1% QoQ while Europe came in weak at 1.4% QoQ growth. Japan and APAC led with 15.4% & 10% QoQ growth. Weakness in investment banking and telecom clients led to a 6.3% QoQ decline in ADM (22.5%) revenues. Business application services (30.7%) & consulting were also weak and declined 1.1% & 14.9% QoQ, respectively.

Reducing FY13E US$ revenue estimate to account for weak Q1

We now expect FY13E revenues to grow 6.2% in FY13E vs. 11% earlier. Rationale being even if Wipro achieves the midpoint of its Q2 guidance, the company needs 3.6% CQGR in Q3-Q4 to achieve 11% revenue growth. That said, rupee revenues bump up led by change in rupee assumption.

Though multiples seem attractive, growth is challenged

We have valued Wipro at 13x our CY13E EPS estimate of | 28.9. We have reduced our target multiple from 15.2x earlier considering that restructuring exercise is taking longer than anticipated while revenue growth and margin profile continues to be lower than industry average.

Inactive client roster increasing

Wipro added 37 clients, lower compared to 41 in Q4FY12, taking the active client roster to 919 vs. 943 in Q4FY12. However, sequentially, inactive clients have increased by 10 to 61 vs. 51 in Q4. Notable wins include Wipro chosen by 1) Philips Electronics for business platform standardisation, 2) leading insurance provider to provide BPO services, 3) a leading medical devices manufacturer, 4) Al-Hammadi hospital for implementing technology platform and 5) Power Grid to implement MPLS network.

Source : Equity Bulls

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