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Wipro gains 1% ahead of demerger meet, but broker view negative

Shareholders of Wipro, India?s third largest IT exporter, met in Bangalore on Friday to discuss the demerger proposal as part of the directive given by the Karnataka High Court to hive off its non-information technology businesses into a separate company.

Shareholders of Wipro, India?s third largest IT exporter, met in Bangalore on Friday to discuss the demerger proposal as part of the directive given by the Karnataka High Court to hive off its non-information technology (IT) businesses into a separate company.

According to the plan, the IT business of the company would become a listed entity under the name Wipro, while the non-IT business, which includes lighting, office-furniture, consumer care products and infrastructure engineering services, would morph into a new non-listed entity Wipro Enterprises.

Shares of Wipro settled 1.31% or R5.05 higher from Thursday’s close to settle at R391.25 ahead of the outcome of demerger proposal. The scrip has appreciated over 10% since the announcement of demerger of its non-IT businesses.

Brokerages and market experts said the proposed demerger would bring greater focus on IT services business. The demerger would also help provide greater clarity on IT business valuation and provide attractive valuation for the non-IT business.

A poll among brokerages suggested that Wipro’s non-IT business would now get a valuation of around 24-27x FY13e P/E, instead of the 13.5x for the combined entity at present. In addition, the terms of the merger will help unlock value for current shareholders, by reducing the promoter holding by up to 2.6% towards meeting the statutory requirements of 75% holding.

?This is positive for Wipro shareholders… By preferring the listed Wipro shares, Wipro?s current shareholders will receive an additional 12.1% Wipro shares. However, removing the PBT accounted for by non-IT businesses (5-6%), this works to be a net benefit of 6-7%,? stated a JPMorgan report.

Despite the positives of demerger, brokerages and experts continued to have a negative view on the stock due to weaker-than-peer outlook for the IT business and weak guidance for Q4FY13.

?While the recent restructuring is a step in the right direction and the changes are visible internally, they still take time to reflect in numbers,? said Bhuvnesh Singh, head of equity research, Barclays Capital India.

According to a report by Ambit Investment Advisory, despite some recent deal wins (such as European Telecoms), the company faces three challenges: lack of strong verticals/horizontals, weak sales engine and rising competitiveness from nimbler peers (TCS, Cognizant, HCLT) and resurgence in MNCs that makes it tougher for underperforming firms.

?Wipro will find it tougher to compete and get back its mojo as the share price implies in the face of weak near-term demand in services, likelihood of continued challenges to offshoring from cloud-based delivery options and recovering usage of captives (global in-house centres) and shared centres. Even if demand were to rebound in H1FY14, Wipro may not be in a strong position to benefit as much as TCS,? said the Ambit report, reiterating a ?sell? recommendation on the stock.

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First published on: 29-12-2012 at 02:28 IST
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