Wipro an underperformer, target Rs 520: CLSA

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Wipro an underperformer, target Rs 520: CLSA

CLSA has maintained an underperformer rating on Wipro with a target price of Rs 520, which implied upside potential of 13%.

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CLSA has maintained an underperformer rating on Wipro with a target price of Rs 520, which implied upside potential of 13%.

CLSA research report on Wipro

In recent meetings with Wipro management suggested that Wipro is still open to (more) acquisitions. Wipro is not averse to raising debt, if so required, but there is no inclination to dilute equity. While Wipro believes that wage inflation would moderate in 2008 (TCS/Cognizant agree, Infosys/HCLT do not) the management feels reset of rupee is permanent and IT vendors need to adjust business fundamentals to counter the same. Wipro is optimistic on the Infocrossing acquisition and believes that the shortage of data centers in US and impending deal renewals in IT outsourcing space present an opportunity. While 2Q Global IT performance is expected to show improvement on both revenue and margin fronts, Wipro's non-IT businesses and the continued possibility of further M&A there remains debatable.

Azim Premji articulates new focus areas; expect IT and non-IT M&A

As per the Chairman, Wipro is focusing on: (i) increased non-linear models of growth using platform BPO, (ii) service oriented architecture and re-usable component (2,500 people in Wipro deployed on this), (iii) delivery expansion into smaller towns, and, (iv) more fixed price projects. Wipro also believes that domestic IT (Indian market) is a huge opportunity and expects the same to grow at 40%+ Cagr over the next 3 years. The company is open to acquiring companies not only in the IT space but also in the consumer care and lighting area, with an inclination to raise debt if necessary. For example, Mr Premji mentioned his interest in the office furniture business, where Wipro is apparently now #3 after Blow Plast and Godrej- Wipro could do a USD 25 million + acquisition here.

Infocrossing: A gateway to the big league?

Wipro believes that Infocrossing provides the company not only a big lead over its Indian peers in Infrastructure management, but also provides an entry point in the big outsourcing deals. With increased acceptance of remote delivery in data center services, large number of IT outsourcing deals up for renewal over the next 2 years and the current shortage of data centers in US, we believe Wipro has an interesting opportunity to scale-up the infrastructure business. This is however a 2-3 year story. Risks come from the potential reduction in data center work and deal renewals in case of a demand slowdown, continued expansion by Infocrossing's competitors resulting in overcapacity and overall integration risks.

Healthy organic revenue in 2Q; long term bets more visible

We expect marginal improvement in Global IT Ebitda on a QQ basis in 2Q, despite offshore wage hikes from 1st August. Organically, we expect 8.6%QQ $-revenue growth from Global IT in 2Q, and one week of IFOX consolidation could take the reported number above the 9% mark. Post Infocrossing, Wipro's long term bets are arguably more ambitious and have long-term potential. An improvement in telecom business visibility and overall clarity on sector demand in 2008 could be the key triggers for the stock.