Wipro Ltd (Q2 FY13)

India Infoline News Service | Mumbai |

Wipro Ltd (Q2 FY13)

CMP Rs363, Target Rs410, Upside 12.9%
  • Volume growth marginally lower; realisation up-tick surprises positively.

  • Narrow based growth with BFSI, non-discretionary services growing well; Client mining impresses again

  • OPM performance beats expectation on the back of strong execution

  • Guidance falls short marginally due to weak IB/Telecom/hi tech demand

  • Decent mgmt commentary, strong execution and continued client mining keep us enthused; Maintain BUY

  • De-merger announcement – The Analysis

Result table
(Rs mn) Q2 FY13 Q1 FY13 % qoq Q2 FY12 % yoy
Net sales 1,06,566 1,06,530 0.0 90,945 17.2
Operating profit 21,382 21,426 (0.2) 17,398 22.9
OPM (%) 20.1 20.1 (5) bps 19.1 93 bps
Depreciation (2,795) (2,704) 3.4 (2,520) 10.9
Interest (537) (1,367) - (1,250) -
Other income 3,234 2,692 20.1 2,113 53.1
PBT 21,284 20,047 6.2 15,741 35.2
Tax (5,079) (4,046) 25.5 (2,841) 78.8
Effective tax rate (%) 23.9 20.2 - 18.0 -
Other Prov./Minority (99) (199) - 109 -
Adjusted PAT 16,106 15,802 1.9 13,009 23.8
Adj. PAT margin (%) 15.1 14.8 28 bps 14.3 81 bps
Reported PAT 16,106 15,802 1.9 13,009 23.8
EPS (Rs) 6.5 6.4 1.9 5.3 23.8
Source: Company, India Infoline Research

Volume growth marginally lower; realisation up-tick surprises positively.

We were slightly disappointed by the Wipro IT services’ dollar revenue performance for Q2 FY13 which grew 1.7% qoq (versus expectation of 2% qoq growth). This growth was on the back of muted volume growth of 0.2% qoq bolstered by the impressive realisation improvement of 1.3% qoq on a blended basis. Management partly attributed the slower volumes to lower effort spill-over due to efficient FPP execution which also lead to the improved realisation. Wipro’s consumer care business continued its strong streak posting 26% yoy growth in rupee terms. Its IT products business, though, remained sluggish (-10.2% qoq in rupee terms) due to its discretionary nature.


Narrow based growth with BFSI, non-discretionary services growing well; Client mining impresses again

Growth across verticals and services continued to narrow based in Q2 FY13 with select segments driving the growth. Within verticals, BFSI returned to growth trajectory posting 4% qoq growth. Energy & Utilities also posted robust growth of 8.2% qoq albeit on a smaller base. With respect to service lines, growth was largely driven by cost efficiency related services of BPO  (+5.4% qoq) and IMS (+3.5% qoq). ADM remained weak de-growing marginally. Client mining at Wipro continued to be commendable with Top 2-5/Top6-10 clients showing 11.1%/8.7% qoq. Top client buckets of US$75-100mn and >US$100mn also increased by 1 sequentially. 


Among geographies, the growth was led by Europe (+2.1% qoq) and APAC/Emerging markets (+5.7% qoq). North America returned to growth (+1.5% qoq) post de-growth of 2.3% in Q1 FY13.


OPM performance beats expectation on the back of strong execution; Attrition cools off

The OPM performance of Wipro both at the consolidated level as well as for its IT services business has been impressive. In a quarter having headwinds of salary hikes, IT services margin corrected only 20bps to 23.6% against our expectation of 180bps correction. Utilization too did not support the operating margin correcting ~200bps qoq. The margin beat as well as higher OI (+20% qoq) and lower interest outgo resulted in the consolidated PAT coming in higher than expected at Rs16.2bn. On the employee front, net additions were decent at 1.5% growth over its Q1 FY13 base. Attrition came down commendably to 14.4% as opposed to 15.2% last quarter.


Guidance falls short marginally due to weak IB/Telecom/hi-tech demand

For Q3 FY13 Wipro has guided towards IT services dollar revenues in the range of US$1.56bn-1.59bn implying 1-3% qoq growth which was slightly lower than our expectation. This, we believe, was largely on the back of sustained weakness in verticals like Investment Banking (IB), Telecom as well as continued slowness is client decision making. On a positive note, management alluded to pick up in demand for Retail banking, Retail CPG verticals as well as Infrastructure, BPO services .This and the improving pipeline for deals were comforting. Pricing/Realisation too are expected to hold on with increased rigor in FPP execution and delivery automation.


Decent mgmt commentary, strong execution and continued client mining keep us enthused; Maintain BUY

We like Wipro’s Q2 FY13 results from various perspectives even with the marginally lower than expected revenue performance and guidance.  The OPM beat on the back of productivity improvements despite headwinds of salary hikes and lack of levers like utilization, offshoring is commendable. Improved delivery due to factors like delivery automation etc is expected to continue as a margin lever (largely not dependent on growth/volumes) for Wipro. Management commentary on deal pipeline as well as continued improvement in client metrics further indicate steady improvement in business post the new structure/strategy came into place. We continue to watch for more evidence on the same. Separately, the de-merger announcement (explained in the note below) adds better focus, more flexibility in the IT business and also addresses the key overhang of high promoter shareholding in the company. We maintain our positive outlook recommending BUY with a 9-month TP of Rs410.


Financial Summary
Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenues 310,542 371,971 433,042 478,391
yoy growth (%) 14.2 19.8 16.4 10.5
Operating profit 65,434 70,811 86,175 94,243
OPM (%) 21.1 19.0 19.9 19.7
Reported PAT 53,625 56,063 65,314 70,946
yoy growth (%) 16.8 4.5 16.5 8.6
         
EPS (Rs) 21.9 22.8 26.6 28.9
P/E (x) 16.6 15.9 13.7 12.6
Price/Book (x) 3.7 3.1 2.7 2.3
EV/EBITDA (x) 12.7 11.7
BSE 289.25 6 (2.12%)
NSE 289.40 6.50 (2.30%)

***Note: This is a NSE Chart

 

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