Hold Wipro; target Rs 424: KRChoksey

“IT Services’ revenue increased by 4.5% QoQ in constant currency terms supported by higher than estimated increase in billing rate i.e. onsite increased by 4.3% QoQ and offshore improved by 3.6% QoQ in Q3FY12 in constant currency terms. However, increase in volume (1.8% QoQ) was lower than our expectation. Moreover, the company continues to trail peer sets in terms of volume growth for instance TCS, Infosys and HCL Technologies reported volume growth of 3.2%, 3.1% and 4.9%, respectively, QoQ in Q3FY12.”

“Wipro has guided that IT services revenue will be USD1,520-USD1,550 mn in Q3FY12E i.e. growth of around 1%-3% QoQ. The revenue guidance by the management is relatively lower than that given by them at the end of Q2FY12 for Q3FY12 i.e. 1.9%-3.9% QoQ growth. Typically Q3FY12 is seasonally weak quarter due to lower number of working days because of Christmas holidays and furloughs declared by manufacturing clients. Hence, relatively lower growth guidance for Q4FY12 indicates that client’s sentiments have deteriorated despite improvement in data flow from US. However, on positive side, Wipro’s revenue growth guidance for Q4FY12 is higher than that of Infosys, which has guided for almost flat revenue growth in USD terms.”

“The company is witnessing pull back in projects by the clients which are discretionary and having long payback period. Taking the same into account, we believe it will be challenging for Indian IT companies to register mid to high teens revenue growth (in constant currency terms) in FY13E only by mining the existing client base, as wining new projects from existing client might be set-off by delay in ramp-up of discretionary or non-strategic projects. Hence, the companies which have strong presence in “Run the Business’ are well place compared to the companies that are relying on discretionary projects for major portion of their incremental revenue growth. IT Services’ EBITDA margin (excluding forex) increased by 41 bps QoQ to 22.6% in Q3FY12 against our expectation of increase by 276 bps QoQ. The higher than estimated decrease in utilization rate (including trainees) by 260 bps QoQ to 73.5% in Q3FY12 and increase in SG&A expenses by 97 bps QoQ led lower than estimated margin expansion. However, we believe the company might surprise on positive side at margin front in the coming quarters considering huge scope of improvement in utilization rate.”

“We believe that deterioration in overall demand environment and reversal trend in INR exchange rate against the major global currencies will limit any upside in the stock from here onwards in near term. Hence, we maintain our ‘HOLD’ recommendation on the stock with a price target of Rs. 424 by assigning multiple of 16 times (i.e. around 10% discount to TCS’s target P/E multiple of 18) to its FY13E EPS of Rs. 26.5,” says KRChoksey research report.

Quarterly Shifts by Public Shareholders holding more than 1%

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