Reduce Wipro; target of Rs 360: Emkay

Emkay Global Financial Services is bearish on Wipro and has recommended reduce rating on the stock with a target of Rs 360 in its November 2, 2012 research report.

“Wipro’s Sep’12 qtr continued to be uninspiring with revenues at US$ 1,541 mn (+1.7% QoQ) broadly inline with est( Emkay est of US$ 1,549 mn) and at midpoint of co’s guidance in constant currency terms (US$ 1,520-1,550 mn). IT services EBIT margins declined by ~30 bps QoQ to 20.7%, lower than estimates aided largely by improvement in revenue productivity as volume growth(+0.2% QoQ) continues to remain tepid and lag Tier I peers. Profits at Rs 16.1 bn(+1.9% QoQ missed expectations driven by lower than expected operational performance but were aided by higher other income/lower forex losses .HC addition was in line with co adding ~2k people during the quarter with utilization declining by ~180 bps QoQ to 73.7%.While Wipro continues to make progress with it’s investments in account mining with top 5/10 clients growing by 8% sequentially as well as no of US$ 100 mn+ clients increasing to 9 now (V/s 8 in June’12 qtr and 5 in Sep’11 qtr).”

“While Wipro’s reenergized senior management has done well with addressing the long standing client mining woes, Wipro’s catch up with peers continues to lag expectations and behind initial timelines (note that Wipro management intended to catch up with peers on revenue/volume growth in 4-6 qtrs time post the top level changes in Jan’11 qtr) as a weak macro environment makes that task difficult. In this context, we highlight that while Wipro’s participation in large deals has increased, it’s success rates continue to be low currently.”

“While valuations at ~13.3x/13x FY13/14E P/E are inexpensive, we see them as fair given continued underperformance on growth (note that Wipro has lagged peers on growth through FY10-12) and we do not see that changing for a while. We have tweaked our FY13/14E earnings lower by 1% each to Rs 27.1/28.2. Retain reduce, TP unchanged at Rs 360,” says Emkay Global Financial Services.

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