Stock Market Result Update on Wipro for 2QFY2012

Stock Market Result Update on Wipro for 2QFY2012 with an Neutral recommendation. 

For 2QFY2012, Wipro reported better-than-expected results with the major highlight being 6.0% qoq volume growth (aided by SAIC’s revenue). The disappointment came from the price realization front, which declined by 0.4% and 4.1% qoq – onsite as well as offshore – in constant currency (CC) terms, respectively. During 2QFY2012, the company’s growth was modest on account of revenue from SAIC; however, organically Wipro continues to lag its peers. We maintain our Neutral rating on the stock.

Quarterly highlights: For 2QFY2012, Wipro registered 6.2% qoq growth in revenue to `9,095cr. Revenue from the IT services segment came in at US$1,472.5mn, up merely 4.6% qoq. This includes revenue of US$46mn from SAIC. Excluding this, revenue growth was merely 2.9% qoq. Revenue from the consumer care and lightening segment grew strongly by 20.3% yoy, while the IT products segment reported a 6.4% yoy decline in revenue. EBIT margin of the IT services and consumer care and lightening segments fell by 200bp and 84bp qoq to 20.0% and 11.0%, respectively; while for IT products, EBIT margin increased by 30bp qoq to 4.5%. Overall, EBIT margin declined by 110bp qoq to 16.4%.

Outlook and valuation: Management has given a decent revenue guidance of US$1.500bn-1.530bn for 3QFY2012 for the IT services segment, with qoq growth of 2-4%, which is slightly less than its peers. Also, management maintained that the company will take another 1-2 quarters to grow at rates comparable to its peers. This implies poor annual growth for FY2012. Thus, we expect revenue CAGR for IT services (USD terms) to be muted at 12.9% over FY2011-13E. At the operating front, Wipro has limited tailwinds and headwinds such as wage inflation, integration impact of SAIC (lower EBIT margin at 13.5%) and moderate volume growth, which are expected to pull down margins. Thus, we expect EBIT margin of the IT services segment to slide down to 17.0% in FY2012 and 16.2% in FY2013. We value the company at 15.3x FY2013E EPS (15% discount to Infosys) of `24.4, which gives us a target price of `373. We maintain our Neutral rating on the stock.