Wipro - Diwali 2012 Pick - Angel Broking

Wipro has identified four momentum industry verticals: 1) BFSI, 2) energy and utilities, 3) retail and 4) lifesciences and healthcare and these verticals account for 65% of the company's revenue. The managements of all its peer companies have indicated that IT spend in industry verticals such as retail and energy and utilities is expected to grow higher than the overall industry growth and Wipro's exposure to energy and utilities is ~100% higher than the next largest competitor in this space (Infosys). We expect USD and INR revenue CAGR for IT services to be at 8.9% and 13.3%, respectively over FY2012-14E.

Wipro has operating margin levers such as improving utilization level and increasing offshore revenue. Wipro's utilization level is currently at 66.8%, which is almost at its historic low levels. The company has headroom to improve its utilization by ~250bp even if management does not want to run a tight ship. In addition, increasing offshoring of revenue could offer a cushion to its margins.

We believe that the step taken by Wipro to hive off its non-IT business is positive for its shareholders. The demerger would result in an increase in ROCE and ROE of the listed entity, as non-IT business had lower return ratios. We expect a 12.8% and 11.1% CAGR in EBITDA and PAT over FY2012-14E. We value the stock at 15x FY2014E EPS of Rs.28.1, which gives us a target price of Rs.421 and recommend it as one of our top picks with a Buy rating.

Source : Equity Bulls

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