Buy Wipro - BP Wealth Diwali Picks 2012

Wipro Ltd is India's 3rd largest IT solutions and services provider offering wide range of services like systems integration, Information Systems outsourcing, package implementation and ADM services to corporations globally. Wipro Limited is the first PCMM Level 5 and SEI CMM Level 5 certified IT Services Company globally. It has a strong presence in niche market segments of Infrastructure Engineering and Consumer Products & Lighting.

Increased spending in BFSI vertical in US to boost revenues going forward

Technology will emerge as both a key enabler and a differentiator over the next couple of years for banks worldwide. All spending is under heavy scrutiny at the moment but, as the role of technology evolves, banks will need to think about technology expenditure in a different way. Instead of being a cost to manage down, it will be seen more as an investment to support growth and new business development. Also with many regulatory changes IT spending by US banks is set to increase to US$ 196 bn in FY13E which will create huge opportunities for Indian IT companies.

Sufficient margins levers in place, OPM margins to expand going forward

Wipro has sufficient margin levers in place such as improving utilization level and increasing offshore revenue. Wipro's utilization level is currently at 66.8%, which is at a historic low level since FY08 which can be improved ~300bps in comparison to industry standards. In addition, Wipro's share of offshore revenue declined to 46.6% due to SAIC's acquisition from 49% earlier (peers have offshore revenue above 50%). Increasing off shoring of revenue is on Wipro's cards right now and could offer a cushion to its margins.

Demerger of non core business to create shareholders value

Wipro board recommended demerger of its Non-IT business which would form a non-listed entity called Wipro Enterprises Ltd (WEL) and the listed IT entity would be Wipro Limited (WL). IT Services accounts for 87% of revenue and 94% EBIT in Wipro Limited. We consider this move to create value for shareholders as the non core business which was dragging return ratios have been demerged. This can possibly lead to rerating of the stock as the IT services business has higher margins and will fill the gap created due to demerger.

Decent quarterly performance

Wipro reported decent quarterly performance with consolidated revenues at Rs 106 bn up 1.49% QoQ. Its IT services business witnessed a 1.73% QoQ growth to $1,541mn fueled by improvement in realization by 150bps. This has also partially offset the wage hike pressure on the margins which contracted by 20bps in Q2 FY13 to 20%. The pipeline looked strong with 53 new client additions. For Q3 FY13, the company has guided for a 1.63% to 3.58% QoQ revenue growth to $1,560mn-$1,590mn which was above estimates.

Valuation & Outlook

Management is optimistic about the overall demand environment but expects budgets to pick up in H1CY13. We believe that the management decision to demerge non IT business will lead to value unlocking for the IT services business which was struggling from the last many quarters. The transition phase has almost finished and growth prospects are bright going forward. We give a BUY rating with a target price of Rs 427.

Technical Outlook

The stock on its weekly chart seems to have completed a corrective wave and is now expected to retrace this wave. The 61.80% retracement of the downmove from 453 to 325 comes @405 while support comes @360-345.

Source : Equity Bulls

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