Wipro Ltd (Q4 FY12)

CMP Rs410, Target Rs471, Upside 14.8% 

• IT services volumes, consolidated revenues marginally lower than estimates; pricing improves

• Select verticals/services/geographies drive growth; Top client de-grows 

• Consolidated and IT services OPM ahead of estimates; Employee headcount down marginally

• Q1 FY13 guidance lower than estimates but management commentary largely positive 

• Though guidance disappoints, we remain positive on long term structural improvement; Maintain BUY

IT services volumes, consolidated revenues marginally lower than estimates; pricing improves

Wipro's IT services dollar revenues in Q4 FY12 of US$1.536bn (up 2% qoq) were a tad lower than our expectation of US$1.548bn. This was primarily because of weaker volumes which grew a meager 0.8% qoq. On the flip side, this was supported by better than expected improvement in realisation with pricing improving 0.6% qoq (0.4% qoq onsite and 1.4% qoq offshore). Lower than expected IT services revenues were offset to a certain extend by strong growth in Consumer care business (up 25% YoY in Rupee terms). IT products business also grew a decent clip of 3% qoq. At a consolidated level, the rupee revenues de-grew marginally by 1% to Rs98.6bn

Select verticals/services/geographies drive growth; Top client de-grows

The revenue growth for Q4 FY12 was been driven by select verticals, services and geographies. On the verticals front, BFSI was weak (down 0.6% qoq in dollar term) similar to the pressure seen at peers. E&U and Retail drove the growth posting 6.8%/4.9% dollar revenue growth sequentially. Services that drove the growth were IMS (+6.4% qoq and Analytics & Info management (+5.4% qoq). Discretionary services like R&D, Consulting, Product engineering had a de-growth indicating a relative weak discretionary spending environment. Within geographies, growth was led by emerging geographies of APAC and IMEA which grew 10.5% and 7.6% qoq in dollar terms. In developed markets, America grew 1.1% qoq and Europe was flat. Top client de-grew by 8.4% qoq in dollar terms post strong run up in Q1-Q3FY12 (10% CQGR over 9m FY12). Top5/Top10 clients registered (0.5%)/2.5% growth.

Consolidated and IT services OPM ahead of estimates; Employee headcount down marginally

The operating margin performance at Wipro has been better than expected. While the consolidated margin expanded 56bps (versus expectation of 14bps expansion), the IT services margin remained flat (versus expectation of 122bps correction). The impact of slower volumes, sustained SG&A investments (SG&A proportion was up 30bps qoq) were offset by better realization, improving utilization (up 60bps qoq) and marginal reduction in employee headcount on a consolidated basis. The reduction in employee base came largely from fall in BPO headcount which is one-off in nature. On a gross basis, the company hired 7400 employees in Q4 FY12. Attrition at 14.4% was largely stable qoq. Management indicated continued investment in SG&A for coming quarters (a possible margin headwind). Higher amount of fresher hiring, utilization improvement, higher offshoring and reduction in sub-contractor costs (a medium term lever) are the key margin levers going ahead. Lower income from affiliates and increase in tax rate led to lower than expected PAT which came in at Rs14.2bn (+1.6% qoq).

Q1 FY13 guidance lower than estimates but management commentary largely positive

A major negative surprise in Q4 FY12 was the -1% to 1% dollar revenue growth guidance for Q1 FY13. This guidance vis-à-vis our expectation of 1-3% growth has been a negative surprise. Management attributed the flat guidance to slower decision making cycles as well as an expected slow down in India business. On the flip side, the management has also indicated certain improvement in deal signings and overall improving decision making. Management also indicated a healthy pipeline going forward with deals from Manufacturing, Healthcare and Oil & Gas especially in areas of cost optimization/cost takeouts. Additionally strong expertise in IMS has led to better traction/winning of IMS related deals.

Though guidance disappoints, we remain positive on long term structural improvements; Maintain BUY

Q1 FY13 guidance at Wipro was a key disappointment re-enforcing a slower near term demand environment as also evident in quarterly guidance by larger peer Infosys. Having said that, the positives of strong pipeline, improved client metrics/mining (revenue/client continues to improve), client satisfaction and stabilizing attrition keep us enthused about the long term structural improvement at Wipro. We also draw confidence from the well balanced verticals mix (lower BFSI exposure and higher exposure to emerging Healthcare, E&U verticals), services mix (lower discretionary exposure and higher exposure in fast growing IMS, Analytics space) and geography mix (balanced across DMs). Nonetheless, on the back of lower guidance, we marginally reduce our FY13E revenue assumptions and now expect 12% dollar revenue CAGR over FY12-14E. Maintain BUY.