Reduce Wipro - Elara Capital

Q1 FY11 results by Pralay Das, Analyst - IT, Elara Capital.

• Sector: IT Services
• Wipro Ltd; Recommendation: REDUCE
• (Bloomberg code: WPRO IN)
• CMP INR 415.4
• Market Cap: USD 21.9bn
• TP: INR 424

First take: Wipro Q1 FY11 results – Onsite shift and constant currency muddies pricing; qoq guidance of 6.1% of revenue encouraging

Wipro has delivered a 4.6% qoq growth in the IT services revenue in INR terms and have delivered a consol EBITDA margin dip of 176bps qoq. Constant currency IT services revenue was USD 1217.6 mn against our estimate of USD 1217 mn. Guidance for the next quarter however, came in the band of 4.1% to 6.1% (against our expectation of around 4.5%).

Pricing – could turn out to be a concern: Onsite and offshore pricing declined by 4.9% and 1.4% qoq respectively. While the management commented that pricing decline was due to cross currency and the fact that there is a shift to onsite for new projects. Newer projects typically involve upfront investments and the realization declines reflect that. We are not entirely convinced by the argument and would look for more clarifications on the call.

BFSI and manufacturing led growth: BFSI and manufacturing drove revenue with 6.4% and 5.5% qoq growth respectively. As we had pointed out in our initiation note, the IMS vertical growth has tapered down (0.8% qoq) after the scorching pace seen in the last few quarters. This is despite the industry wide deal flow in the IMS space, and is likely to be a function of the fact that data canter assets of Wipro are working at close to full capacity.

Europe: Wipro management commented that Wipro's presence in Europe is away from the hotspots of PIIGS. Moreover, management confirmed our view that corporate spending in these zones and Europe in general, has not been so far, been impacted by the turmoil. Moreover, the Euro depreciation means that the continental European hubs of France and Germany have become very attractive destinations to export from.

Valuation and our take: The stock is currently valued at 20.0x our FY11 EPS estimates (adjusted for the bonus and RSUs). We do not see material upside from current levels as attrition at 15.8% and limitation on data center assets would put a cap on topline and margins respectively. Pricing also seems to be a worry for Wipro as India business would look to scale up. We maintain our Reduce rating on the stock with a TP of INR 424.

Source : Equity Bulls

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