Stock Fundamentals

Wipro Ltd: Buy

K. Venkatasubramanian | Updated on December 10, 2011 Published on December 10, 2011

Revival in large deals and growth from emerging markets make Wipro a good bet in a volatile market.



Investors with a two-year horizon can buy the shares of IT major Wipro, given its return to a broad-based growth path in line with peers.

The current economic environment in the US and Europe, though worrisome, has had limited impact on the budgetary spends of clients, both of the normal business efficiency as well as the discretionary kinds.

In this light, with a healthy vertical-mix, revival in large-deals and growth from emerging markets, Wipro appears a good bet for investors to ride out the current market volatility. At Rs 404, the stock trades at 14 times its likely per share earnings for FY13. This is at a discount to peers such as Infosys and TCS and even relatively lower margin players such as HCL Technologies.

After weathering the slowdown, post-2008, better than its peers, Wipro failed to latch on to the upswing in 2010-11, the way TCS and HCL Technologies were able to. A management reshuffle followed. With both CEOs moving out, the dual CEO structure was dismantled, and replaced with one CEO and a simpler organisational structure.

It must be noted that even though the revenue growth in FY11, at 18.9 per cent, was 3-4 percentage points lower than competitors, the company held on to operating margins of 21-22 per cent. One reason for Wipro's slower growth was also a conscious decision to not chase volumes as it used to earlier. Billing rates have been stable over the past several quarters. Wipro has now caught up with its peers, especially in the recent September quarter, with its IT services division delivering growth across segments and reporting a 19 per cent increase in revenues over the same period in the previous fiscal.

The company's IT products division continues to witness traction in terms of deal wins in India as well as in the Middle-East and African (MEA) region.

Revival in deals

Wipro has seen a steady increase in large deals ($100 million plus) over the past 4-5 quarters. From just one client, the company now has as many as five customers in this bracket. The other large pockets of $75 million and $50 million too have seen healthy additions.

While new deals have come about at a sustained momentum, existing clients too have ramped up contribution to revenues. The company's top 10 customers have grown by 20.5 per cent over the past one year and now account for 20 per cent of overall revenues. This suggests robust client mining capabilities.

Also, the company has in the recent few quarters witnessed higher volume growth onsite than offshore. This indicates that the deal pipeline is robust and project execution is on track and may also suggest that there aren't any cutbacks from clients. The IT services division contributes about 75 percent of Wipro's revenues. Its products (hardware – Wipro Infotech) division accounts for around 11 percent of revenues and has had a steady stream of contract wins.

Apart from the large IT outsourcing contracts from Unitech Wireless, Delhi International Airport, Aircel and Punjab & Sind Banks others, the company has also won deals from State governments. Punjab, Rajasthan and Jammu & Kashmir are some examples where Wipro Infotech has won long-term (five years) deals for services such as development of state portals, tax management systems and automating power distribution departments. The company also has a strong presence with implementations for domestic banks.

BFSI leads growth

Being a relatively late entrant to target growth in the banking segment compared to Infosys and TCS, the company has over the past few years focused on deriving a greater share of revenues from this vertical, which now accounts for over 27 per cent of revenues. Retail & Transportation (14.7 per cent of revenues), Manufacturing (19 per cent) and Energy & Utilities (13.7 per cent) are other key verticals apart from a tepid telecom business.

The company thus has a healthy vertical-mix with a blend of growing verticals (BFSI, Energy & Utilities) and a moderately paced retail segment.

The acquisition of oil & gas information technology practice of SAIC (Sciences Applications International Corporation), a large US-based player catering to global oil operators too is a positive move directed at bolstering the energy and utilities vertical. The company hopes to generate at least $188 million annually from this acquisition.

In terms of geographies , Europe continues to grow at or faster than the company rate, while the US remains relatively sedate. But this is being made up through healthy expansion in fast growing geographies such as India and Asia-Pacific.

Concerns

Attrition, at 18.5 per cent, though declining steadily, is still higher than peers and any wage hikes to stem this may affect margins. The company has hedged about $1.7 billion, only around 28.3 per cent of its annual inflows and hence may benefit from the rupee depreciation to Rs 52 levels.



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