KRChoksey has recommended hold rating on Wipro with a target of Rs 441, in its July 20, 2011 research report.
“Wipro, decline in revenue from one of the top 5 client (revenue share of top 2-5 clients declined by 70 bps QoQ to 7.6% in Q1FY12) adversely impacted overall revenue growth in Q1FY12. The revenue from IT services segment increased by 0.5% QoQ (in USD) in Q1FY12 against our expectation of around 2% QoQ growth in topline. The revenue, excluding contribution from recently acquired SAIC of ~USD10 mn, declined by 0.2% QoQ in Q1FY12, which is lower than management guidance of 0.5%-1.5% QoQ growth on an organic basis. Moreover, offshore and onsite billing rate came down by 0.4% and 0.9% (on QoQ basis), respectively, in Q1FY12 primarily due to stiff competition being faced by the company especially in application management. Whereas, strong growth in IT products and Others segment led overall revenue growth in line with our expectation i.e. 3.2% QoQ to Rs.8,564 crore in Q1FY12.”
“We believe the company will be overtaken by Cognizant as the third largest (in terms of revenue from IT services segment) Indian IT company in this quarter (refer table here under). This might adversely impact its image and consequently number of large or transformational project it is invited to participate in bidding. Management has guided that IT services revenue will be USD1436-USD1464 mn in Q2FY12E after considering incremental contribution of USD40 million from recently acquired IT segment of SAIC. Hence, it has guided for decline in revenue by around - 0.8% to 1.2% (on QoQ basis) in Q2FY12E on like-to-like basis in seasonally strong quarter. We believe the primary reason for lackluster guidance is due to the fact that traction is witnessed only in 2 major segments (BFSI and retail) by the company, which contributes 37% of the total revenue, as against peers which are recording broad based growth.”
“IT Services’ EBITDA margin remained more or less stable at 25.1% in Q1FY12; despite impact of wage hike for 1 month, dip in offshore and onsite billing rate, and lower margins of SAIC having impact of 10 bps QoQ. The margins were primarily supported by improvement in realized exchange rate by 1.3% QoQ to Rs.45.3/USD and increase in overall utilization rate (including trainees) by 80 bps QoQ to 76.9%. Considering, significant challenges lying ahead for new CEO (Mr. Kurien) in maintaining the position of third largest India based IT service provider and slower volume growth than industry’s average in FY12E, we maintain our ‘HOLD’ recommendation on the stock with a price target of Rs. 441 by assigning multiple of 17 times (i.e. around 15% discount to Infosys’s target P/E multiple of 20) to its FY13E EPS of Rs. 25.9,” says KRChoksey research report.