Wipro - Value play; initiate with Hold - Anand Rathi

Likely surge in renewal deals in infrastructure over FY13-14 could come to Wipro's rescue amidst uncertain discretionary spending environment. The IMS segment clocked Rs.62.6bn in FY12, an 18.5% CAGR over FY09. We expect the company's revenues to post 9.3% CAGR (US$) over FY12-15, driven by higher $100m accounts and lower attrition. We initiate coverage with a Hold and target of Rs.410.

- New management to deliver results in near term. Wipro rightly recognized the issue of muted revenue growth and slow decision making due to the joint-CEO structure. Restructuring of the top management last year is likely to show results, going forward. Positive triggers are: Rise in the number of US$100m+ accounts, from one in Q3FY11 to nine in Q2FY13, and decline in attrition from 22% to 14.6%.

- IMS to compensate slowing down discretionary spends. In FY12, IMS (34.5% market share) clocked Rs.62.6bn in revenue, recording 18.5% CAGR over FY09-12 against 14.1% for IT services (incl. BPO). Wipro would be the key beneficiary of the surge in renewal deals in infrastructure services expected over FY13-14.

- Revenue underperformance to continue over near term. We expect Wipro to record a 9.3% revenue CAGR (US$) over FY12-15. In FY15, its EBITDA margin could drop by 50bps, to 19.3%. We expect 11.7% CAGR in profit. In the past two years, Wipro has lagged the large-cap IT services companies. We believe this underperformance will continue awhile.

- Valuation. We value Wipro at 14.5x FY14e earnings of Rs.27.7, which is justified since the company could report 11.7% earnings CAGR over FY12-15. Risks. Slow ramp-up in key growth areas (the US, Europe and BFSI) would prove detrimental to our estimates and rating.

Source : Equity Bulls

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