>Wipro (ICICI Securities)

WIPRO

In the era of tumult....

* Key takeaways from Telecom vertical are: i) though OEMs are not in a bad shape, they are increasingly cautious on incremental spending, ii) cost structure of OEMs is significantly higher, implying more pressure to outsource/offshore, iii) Nortel has released a new purchase order to Wipro and the company is confident of receivables, iv) with the merger of IT and R&D, the combined offering is now available to clients and v) top eight OEMs form 95% of the vertical’s revenues (~10% of IT services revenues) – Negotiations/renegotiations with six clients are already over with the remaining two under consideration.

* No visible demand uptick. The demand environment remains weak, though enquiries/client interactions have increased. Deteriorating macro was accounted for in Wipro’s Q4FY09 guidance of 6.8% QoQ organic IT services revenue decline (in constant currency) with assumption of pressure on pricing and volume.

* Pricing pressure. With volume pressure, increased competition and vendor consolidation, pricing pressure has intensified. However, the management believes that pricing pressure could be eased via the use of different pricing models such as sharing risk-reward, especially in product engineering and higher fixed-price contracts.

*Higher OCI, but increased tenure to cap notional loss realisation. OCI of Rs15bn is likely to rise with the recent rupee depreciation, but as the maturity of the contract is spread over more than two years, realisation of notional losses will be capped.

* Maintain HOLD. Given the continued uncertainty in demand outlook, we reiterate our cautious stance on IT in the short-to-medium term. With no BUYs recommended within large-caps, we maintain HOLD on Wipro.

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