Hold Wipro; target of Rs 432: Sushil Finance

Sushil Finance has recommended hold rating on Wipro with a target of Rs 432, in its December 10, 2012 research report.

“Wipro, during Q4FY11, the management decided to change its joint-CEO leadership structure and appointed Mr. T K Kurien as a new CEO of its IT business. The management also restructured its business units & redefined strategic business units (SBUs) as healthcare, pharma & life sciences; manufacturing & hi-tech; energy & utilities; technology, media & telecom; financial services; and retail & transportation. The SBUs were created to have single point accountability along with focusing on faster & impeccable execution of projects. This strategy has been working very well for Wipro and has resulted into strong client acquisitions especially in Tier-I accounts which has grown substantially from Q3FY11 (>$100 mn- 1, >75 mn-10 & >50 mn-21) to Q2FY13 (>$100 mn-9, >75mn-16, & >50 mn-25). While, the number of active customers has grown at a slower pace from 880 in Q1FY11 to 939 in Q2FY13 as the management has been continuously monitoring its Tail accounts which are not strategic fit and reduced them from 87 to 45 in last 1 year. Going forward, we expect Wipro would continue to leverage its new strategy to win large accounts.”

“Recently, Wipro in its board meeting approved the demerger of Non-IT business (Consumer Care & Lighting, Infrastructure Engineering, and Medical Diagnostic Product & Services) into a separate company to be named Wipro Enterprises. Wipro will focus exclusively on IT biz and remain listed while Wipro Enterprises will be an unlisted company. Although, the demerger is planned to increase public float in Wipro for the purpose of meeting the minimum public shareholding requirement under clause 40A of its listing agreement, it also provides value to minority shareholders. The demerger will help in managing the individual businesses and the investment needs as per their individual growth plans to better serve the needs of the customers. The minority shareholders will have option to either receive one 7% Redeemable Preference Share of Wipro Enterprises with FV of Rs.50 and 12 months maturity, for every 5 shares of Wipro which shall be redeemed at Rs.235.2, or receive 1 equity share in Wipro Enterprises for every 5 equity shares of Wipro which can be exchanged for 1 equity share in Wipro for every 1.65 equity shares in Wipro Enterprises. We believe the demerger is value accretive for all the shareholders as Non-IT biz contributes ~14% of Revenues & ~6% of EBIT to Wipro’s business.”

“During FY09-12, its INR Revenue & EBIT has grown at CAGR of ~13% & ~14% respectively. During the period, the IT business Revenue has grown at 12.6% CAGR, while Non-IT business has grown at decent 21.3% CAGR. The quarterly Revenue of IT Services in USD term has grown at decent 2.8% CQGR during Q1FY11-Q2FY13 and has mostly been in line with the guidance provided by management. The EBIT margin of IT Services business stands at ~21% amidst 350 bps drop in utilization during this period. Wipro has also been generating strong cash flow with decent RoE (21%) & RoCE (20%) and has high Net Cash (Rs.84 bn) in the balance sheet. Considering its strong account additions in last 2 years, its SBUs led growth approach and its broad positioning in global market, we expect Wipro to deliver decent 14.4% Revenue CAGR and 15% EBIT CAGR during FY12-14E.”

“Wipro has delivered 2.8% CQGR in its IT Services USD Revenues during last 10 quarters. However, its EBIT Margin has reduced gradually from ~24% to ~21%, mainly due to ~350 bps drop in utilization (~78%) during the period and increase in onsite contribution since its acquisition of oil & gas IT practice of SAIC (Science Applications International Corp) in Apr’11. Going forward, we expect Wipro to deliver decent Revenue growth and expand its margins by improving its utilization given its strong deal wins and pipeline. We expect its FY13E & FY14E Revenues to grow by 15.8% & 12.9% to Rs.430.8 bn & Rs.486.5 bn respectively, while expect its APAT to increase by 13.7% & 12.2% to Rs.63.4 bn & Rs.71.1 bn in FY13E & FY14E respectively. The valuation looks attractive as the CMP of Rs.382 discounts its FY13E & FY14E Earnings of Rs. 25.7 & Rs. 28.8 by 14.9x & 13.3x respectively. Considering these factors, we initiate coverage on the stock with a ‘HOLD’ rating and a price target of Rs.432 (15x FY14E EPS),” says Sushil Finance research report.

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