Reduce Wipro - TP Rs 424 - Elara Capital

• Wipro
• Rating : Reduce
• Target Price : INR424
• Upside : 3%
• CMP : INR412 (as on 23 July 2010)

No 'surprise element' in numbers

Wipro delivers in-line quarter with strong 2Q guidance

Wipro delivered consolidated revenue and EBITDA margins precisely in line with our expectations. Constant currency IT services revenue was USD 1217.6 mn against our estimate of USD 1217 mn. The beat on the PAT level was driven by our miss on the tax rates and a tax write-back. Guidance for the next quarter however, came in the band of 4.1% to 6.1% (against our expectation of around 4.5%). Wipro's confidence on the guidance front seems to stem from the higher project transitions (16% qoq growth in onsite volumes) seen in this quarter which is expected to translate into offshore volumes in the quarters ahead.

Pricing drop inspite of strong growth in PE and PI; IMS drags

Inspite of strong growth in product engineering (18.5% qoq) and PI (9.7% qoq), reported pricing declined by 4.9% qoq onsite and 1.4% offshore. Management explained that while the coupon rates have not dropped, the upfront investments that new projects entail have led to the poor margins. We expect this quarter's pricing to be the bottom for FY11 and our estimates build in slight uptick in pricing from next quarter on. 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. Company has started adding data center capacity and has bought data center assets in Europe for Euro 5mn.

Supply side concerns continue unabated

Wage hikes have not really tamed attrition for Wipro though the Company was the first to recognize the attrition problem and give out wage hikes. Annualized attrition stood at 23% for Wipro and management might be forced to dole out further hikes in FY11. Impact from promotion of 20,000 employees is likely to come next quarter.

Maintain estimates; rating remains at Reduce

We are largely maintaining our estimates and our target price now stands at INR 424 (after adjusting for the change in share count). With valuations in line with Infosys, we do not believe that there are material upsides to stock price as multiple headwinds to margins surface.

Source : Equity Bulls

Keywords