Wipro?s Q3FY11 volume growth of 1.5% QoQ was disappointing and even lower than Infosys? 3.1%. IT Ebit margins were sequentially flat despite lower utilisation, lower working days and currency headwinds. Margins benefited from pricing and higher fixed-bid. Guidance of 3-5% revenue growth in Q4FY11 was slightly below our expectation.
Q3FY11 volume grew 1.5% QoQ, which lagged its peers for the second consecutive quarter. An offshore price increase of 3.7% and onsite increase of 0.6% QoQ (2.5% and -0.8% in CC) ensured revenues were in line with expectations at $1,344m, representing sequential growth of 5.6%. The technology and healthcare verticals were especially weak, reporting a sequential decline in revenue of 3.5% and 3.6% respectively (CC decline of 4% and 4.8%). Energy and Utilities (9.9% of revenue) grew fastest at 16.5%.
The stepping down of Wipro?s joint CEOs was a surprise and was likely to have been driven by the company?s underperformance to top-tier peers ever since the industry emerged from the downturn. New CEO Kurien?s credentials seem strong, having led Wipro?s healthcare, telecom and BPO practices in the past. The immediate focus of the new leadership would be to return Wipro to peer growth rates and not so much on margins.
IT Ebit margin was flat QoQ (versus our estimate of 40bp improvement to 22.6%), which is credible given lower working days, lower utilisation and a 50bp currency headwind in Q3FY11. SGA continues to remain high at 12.3% of revenue, which can be used to offset prospective margin headwind in Q1FY12 on the further wage increases.
We believe lower exposure to higher growth BFSI and higher exposure to lower growth TMT verticals makes things more difficult. We are embedding slightly lower volume growth for few quarters and revise our EPS assumptions downwards by 4.4% (to Rs 24.1) for FY12 and 4.3% (to Rs 28.7) for FY13. We expect Wipro?s US dollar revenue to post 20% CAGR over FY11-13 and EPS CAGR of 15%. The stock trades at a P/E of 18.9x FY12E and 15.9x FY13E. We maintain neutral, with a target price of Rs 488, based on 18x FY13E.
? Motilal Oswal
