>WIPRO LIMITED (MORGAN STANLEY)

Strong Q1 Helps FY Earnings Outlook; Move to EW

Investment conclusion: Wipro’s operating performance exceeded our expectations in the June 09 quarter. Margins were maintained across various businesses, and free cash flow yield improved to 7% on an LTM basis. Q1 performance set a strong base for FY10e. Despite sluggish revenues, we believe Wipro could deliver stable earnings for the year, and we are upgrading Wipro to EW with a price target of Rs410.

June 09 Results: Wipro reported revenues of US$1033m (+1.3% qoq, -3.3% yoy) and met its
guidance. Q2FY10 guidance of US$1035m -1053m implies 0-2% qoq growth for Q2. Operating margins improved across various businesses yoy.

Conference-call takeaways: 1) Mgmt expects pricing pressure to prevail on parts of the business through the year. 2) Mgmt expects to maintain IT services’ margins if the environment stabilizes where it is currently. 3) Financial services, BPO, manufacturing and retail saw
some stability during the quarter.

Raising estimates: We are raising our FY estimates for Wipro by ~11-20% for FY10-11e to factor in stable margins for the year and adjusting tax rates for FY11-12e post the extension of STPI tax holiday for one more year. Given the steep run-up in the stock price over the last two weeks, Wipro currently trades at ~16x FY10e EPS in an uncertain environment. We would wait for market expectations to rationalize or indicators of a meaningful pick-up in the tech spending environment before turning more constructive on the stock.

To see full report: WIPRO