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Wipro 2QFY2012 performance highlights and results update
By Angel Broking
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 Rs.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 Rs.24.4, which gives us a target price of Rs.373. We maintain our Neutral rating on the stock.
For 2QFY2012, Wipro’s IT services revenue came in higher than expected at US$1,472.5mn, up merely 4.6% qoq, primarily led by volume growth of 6.0% qoq. However, pricing (on a reported basis) – onsite and offshore – again declined by 0.4% and 4.1% qoq, respectively, due to closure of few fixed price projects during the quarter. In CC terms, offshore pricing declined by 3.5% qoq, while onsite pricing remained almost flat qoq. Pricing declined because of portfolio effect as revenue from America, which has got higher price points, grew by merely 2.2% qoq in CC terms, while revenue from APAC, which typically has lower price points, grew by 13.9% qoq in CC terms. The revenue figures include US$46mn from SAIC’s oil and gas business, which Wipro acquired in April 2011 and got fully integrated in 2QFY2012. On an organic basis (excluding SAIC), revenue growth stood at 2.9% qoq.
Volume growth for the global IT business of the IT services segment came in at 6.0% qoq, led by whopping 9.0% qoq growth in onsite volumes; offshore volume growth was at 4.7% qoq. On an organic basis, volume growth stood at 4.6% qoq. In 2QFY2012, unfavorable cross-currency movement impacted Wipro’s IT services revenue by US$13mn as USD appreciated against GBP, Euro and AUD on a qoq basis. In CC terms, the IT services segment’s revenue came in at US$1,485mn, up 5.5% qoq. In INR terms, revenue of the IT services segment came in at Rs.6,829cr, up 6.6% qoq.
Service wise, Wipro witnessed modest revenue growth across its discretionary service verticals. Technology infrastructure services (contributed 22.1% to revenue), analytics and information management (contributed 6.6% to revenue), product engineering and mobility (contributed 8.4% to revenue) and consulting (contributed 3.2% to revenue) reported 6.4%, 7.3%, 5.7% and 5.7% qoq growth, respectively. Revenue from business application services (contributed 30.5% to revenue) also grew by 5.1% qoq. Other service verticals such as application development and maintenance (ADM) and R&D business posted 3.4% and 4.7% qoq growth in revenue, respectively; however, the BPO segment reported a 0.9% qoq decline in revenue during the quarter.
Discretionary services typically have higher price points than normal business operations type services. For Wipro, even when growth was reported in discretionary services, pricing declined – which is a concern. So going ahead, even if the company ramps up in annuity-based services, which are typical business operations type, the fear of price decline is higher, which will eventually lead to erosion in revenue growth.
Industry wise, Wipro’s growth was led by energy and utilities (contributed 13.7% to revenue), which reported 24.0% qoq growth (CC terms). This growth in the energy and utilities segment was majorly due to acquisition of SAIC’s oil and gas business, which contributed US$46mn to the company’s overall revenue. Organically, growth in this segment stood muted. Revenue from the company’s anchor vertical, financial services (contributed 27.1% to revenue), reported 6.9% qoq growth. The company is seeing some amount of softness in IT spend coming from investment banks of Europe; however, no delays are seen in any other areas. Revenue from retail and transportation, manufacturing and hi-tech and healthcare, lifesciences and services grew by 3.8%, 1.2% and 1.8% qoq (CC terms), respectively. On the other hand, global media and telecom (contributed 15.7% to revenue) reported a 0.6% qoq decline (CC terms) in revenue. Management indicated that in the telecom industry, the equipment manufacturers’ space is still challenged in terms of IT spend; service providers are looking into new opportunities, which might kick in some amount of IT spend from the telecom industry.
Geography wise, Wipro reported increased revenue from all geographies. Revenue from Japan, which took a major hit in 1QFY2012 due to natural calamities, posted whopping 16.2% qoq (CC terms) growth. Revenue from developing geographies – India and Middle East and APAC – grew by 11.6% and 13.9% qoq (CC terms), respectively. Revenue from America and Europe increased by 2.2% and 6.8% qoq (CC terms), respectively.
During the quarter, the IT services segment’s revenue came in at US$1,472.5mn (including US$46n from SAIC), up 4.6% qoq, with India and Middle East business, being the major growth driver, posting 7.5% qoq growth with revenue coming at US$248mn. Revenue from Global IT business and BPO came in at US$1,095mn and US$130mn, up 4.7% and down 0.9% qoq, respectively.
The IT products segment reported a 6.4% yoy decline in revenue to Rs.1,001cr during the quarter. The consumer care and lightening segment emerged as the primary growth driver for the company by posting 20.3% yoy growth in revenue to Rs.800cr, with Yardley, Santoor and Chandrika bolstering growth. In the lightening business, Wipro is gaining traction in its eco energy business, which involves managing energy through use of renewable products.
Hiring and utilization
Net additions during the quarter were strong at 5,240 employees, taking the total employee base to 1,31,730. This also includes ~1,450 employees acquired from SAIC. Voluntary attritions (annualized) declined to 18.5% from 23.2% in 1QFY2012 in global IT. Also, attrition rate (quarterly) in BPO declined to 14.1% in 2QFY2012 from 15.3% 1QFY2012.
Utilization rate of the global IT business decreased by 40bp qoq to 69.3%. As per management’s plans, of the total hiring to be done in FY2012, 70% would be freshers, which in turn would not give utilization level much headroom to scale up from current levels in the next couple of quarters.
EBIT margin for IT services declined by 200bp qoq to 20.0% due to 1) negative impact of wage hikes given from June 1, 2011, and 2) lower operating margin of SAIC. However, these negative impacts were partially offset by higher INR realization by the company. EBIT margin for the consumer care and lightening segment continued its declining momentum and dropped off by 84bp qoq to 11.0%. However, EBIT margin of the IT products business improved by 30bp qoq to 4.2%. On a consolidated level, Wipro’s EBITDA and EBIT margins declined by 106bp and 110bp qoq to 19.1% and 16.4%, respectively.
Wipro added 44 new clients in 2QFY2012, with its active client base standing at 930 in 2QFY2012. The company’s client pyramid witnessed a slight qualitative improvement, with one client getting added in the US$100mn plus revenue bracket. Few clients from the US$5mn-10mn revenue bracket moved to the higher revenue brackets.
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, underperforming not only tier-I IT companies but also tier-II IT companies such as Hexaware Technologies, Mahindra Satyam and MindTree.
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. Utilization, the company’s margin lever, is expected to be partially capped as the company targets to have ~70% of its gross hires as freshers. Also, the company plans to continue making investments in S&M. Thus, we expect EBIT margin of the IT services segment to slide down to 17.0% in FY2012 and 16.2% in FY2013. Also, the ~400bp increase in effective tax rate is expected to mar the company’s net profitability further, and we expect only a 6.3% CAGR in PAT over FY2011-13E. Thus, we value the company at 15.3x FY2013E EPS (15% discount to Infosys) of Rs.24.4, which gives us a target price of Rs.373. We maintain our Neutral rating on the stock.
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