>Wipro Technologies (EMKAY)

Delivers in line but red flags still up

Delivers in line on revenues, margin resilience driven by lower SG&A expenses

Volume decline sharpest amongst peers at ~6.3% QoQ as weakness in financial services and telecom clients catches up with the co. See more pressure ahead on this count.

Reported Pricing holds firm V/s peers because of higher fixed proportion of business (up~900 bps YoY) but reflects in lower volumes/lower realizations

Do not share similar optimism as co management which is in stark contrast to peers as we believe that the lagged effects of weakness for financial services, manufacturing will start reflecting going forward

Upgrade FY10/FY11E EPS by ~3%/2% on exchange rate resets to Rs 23.8 and Rs 24.4 respectively.

Maintain Reduce with a revised target price of Rs 240 (V/s Rs 220 earlier)

Q4FY09 Results; Delivers in line
Wipro reported revenues in line with estimates at US$ 1046 mn (down ~5% QoQ, +1.4% YoY). EBIT margins at 17.7% expanded by an impressive 190 bps sequentially helped by tighter cost controls however driven majority by cuts in SG&A expenses (down by ~140 bps QoQ). Net profits at Rs 9073 mn (+1% QoQ, +3.3% YoY) beat estimates marginally. However we are surprised by the steep decline in volumes at ~12% QoQ onsite and ~4% QoQ offshore which in our view is driven by sharp ramp downs at major financial services and telecom clients.

Reported pricing holds up, isn’t the cut reflecting in lower vols/utilization??
Wipro’s reported pricing ( offshore price realizations down 0.1% QoQ while onsite price realizations up ~0.8% YoY) held up well as compared to much steeper declines for other peers like Infy and TCS (Infy blended pricing down by ~3% QoQ and ~2% QoQ dip for TCS). However we note that actual realization pricing cut may continue to be not reflected in the reported realization metric but show up in lower volumes and lower utilization as a T& M engagement gets converted into a fixed price engagement. Thus in our view some of the pricing pressures being witnessed by Indian IT companies will rather show up in the form of lower volumes for Indian IT companies.

Management appears optimistic but admits to macro weakness as well
Wipro management appear confident of business prospects saying that the ‘worst might be behind us’ however admitted that they were facing pressures in the financial services space (with unpredictable project cancellations/ramp downs etc). Revenues from the Telecom and the financial services business declined by ~13%/5% QoQ respectively. We believe that the co would continue to face more macro headwinds from these spaces going forward (a view confirmed by TPI findings released yesterday).

Up FY10/FY11E EPS by ~3%/2%; Maintain REDUCE with TP of Rs 240.
We have cut our FY10/FY11 US$ revenue estimates marginally and reset our avg estimates at US$/INR of Rs 48.25/Rs 46.25 for FY10/FY11respectively which leads to an upward revision in FY10/FY11E EPS by ~3%/2% respectively to Rs 23.8 and Rs 24.4 respectively ( V/s Rs 23.1 and Rs 23.8 earlier). We maintain REDUCE with a revised target price of Rs 240, based on 10x 1 year rolling forward multiple.

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