Wipro - Company Update - Change in sales strategy delivering credibly - Centrum

Rating: Buy; Target Price: Rs620; CMP: Rs522; Upside: 19%

Change in sales strategy delivering credibly

We maintain Buy on Wipro with a revised TP of Rs620 (earlier Rs600). Wipro's non-top-10 client growth sluggishness, the key reason for its revenue underperformance vis-à-vis TCS, could change for the better. The account mining strategy through assigning client engagement managers to Mega and Gamma accounts has delivered good results within the Top-10 and hold substantive potential for the non-top 10 accounts as well. We also anticipate improved new account traction led by BFSI and Europe. In a recent meeting with the company, we felt that it is upbeat on encouraging revenue traction next year compared to FY14. We revise our estimates marginally and they remain higher than consensus.

- Wipro has lagged TCS in non-top-10 growth, but matches Top-10 growth: Wipro has come close to matching TCS' growth for the Top-client and the Top 6-10 clients while exceeding TCS' growth rate for the Top 2-5 (see table in attached report). While the sales engine seems to be smooth, with new account relationships accounting for over 3% of revenue by every Q4 over FY11-FY13 (vs. 2.6-3.5% for TCS), it has lagged TCS substantially in non-Top-10 client growth. We note that the same trend holds for both a 5-year and 2-year period. The key account strategy at Wipro seems to have delivered results helping it narrow the growth gap with TCS, at least for Top-10 clients.

- New sales leadership for BFSI and Europe to help improve traction with non-top-10: We expect Wipro to increase sales efforts in BFSI as it now has two senior leaders with P&L responsibilities for BFSI (one who was earlier with Infosys and the other was earlier Group CTO at a large UK retail bank). With an internal structure that provides incentives to collaborate, we expect BFSI traction to improve given the new senior leadership. Europe has also got thrust with a key senior hire in Ulrich Meister (formerly head of the Global System Integration business at T-Systems). While he does not hold a direct P&L responsibility, he still has revenue targets and will manage key client relationships.

- Double counting revenue for internal credit to provide incentives to collaborate: With two leaders for BFSI, there is potential for conflict and turf-wars. But Wipro has a process-based approach to smoothen the kinks by allowing double-counting of revenue for internal recognition. While this structure has been in place earlier, the new emphasis on results will encourage proactive collaborative efforts across both P&L units and shadow P&L units (such as Continental Europe, Growth Markets etc).

- Increasing revenue and margin estimates; maintain Buy: Wipro is currently trading at 14.4x Oct'13-Sep'14 EPS and at a steep discount of 19% to Infosys in P/E terms. We modify our revenue estimates by reducing them slightly for FY14E (to account for furloughs which we had earlier anticipated to be curtailed), while increasing them for FY15E and FY16E for IT Svcs. We have also adjusted for the discontinuation of Wipro branded hardware - overall revenue impact of (1.1)% and (0.1)% impact on EPS. We maintain Buy and increase our TP to Rs620 (14x 1-Year Fwd EPS).

Source : Equity Bulls

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