Tuesday, April 27, 2010


Wipro 4QFY10 results in line, margins surprise positively, elevated attrition a risk; Neutral
Wipro's 4QFY10 results were in line with our estimates. The key highlights were:

1] US dollar revenues were up 3.5% (v/s our estimate of 4% QoQ), 1QFY11 guidance was 2-4.2% QoQ (v/s our expectation of 3-4%). Overall EBIT margins and IT EBIT margins were ahead of expectations on improved acquired company profitability and reduction in non-staff costs. Overall EBIT margins improved by 20bp to 191%, IT EBIT margins increased 60bp to 24.2%.

2] Wipro does not envisage wage inflation in FY11, despite attrition increasing from 13.4% to 17.1% QoQ. Our assumptions build in 7% offshore wage hikes in FY11. This brings wage inflation in line with TCS and Infosys (13% and 14% offshore respectively), given the 8-9% offshore hike in 4QFY10 (effective for two months). We expect IT EBIT margins to fall by 70bp to 22.7% (v/s Wipro's expectation of flattish margins, given our mid-year wage inflation expectation).

3] The company declared a 2:3 bonus and dividend of Rs6/share, reinstating dividend to pre -FY09 levels (after which dividend was cut to Rs4/share).

Our FY11 EPS (Rs34.7) are downgraded by 3% and FY12 EPS are constant (Rs40), incorporating [1] mid-year wage inflation expectations of 7% offshore [2] INR/US$ assumption change from 46 to 44.5. We expect Wipro to post US$ revenue CAGR of 19% over FY10-12 and an EPS CAGR of 13% in the period. The stock trades at a P/E of 20x FY11E and 17.3x FY12E. We maintain Neutral with a target price of Rs760, based on 19x FY12E earnings. Infosys and HCL Tech remain our preferred picks among top tier IT companies.

Wipro 4QFY10 revenue up 3.5% QoQ, guides for 2-4.2% growth in 1QFY11 Wipro's 4QFY10 revenue at US$1166m grew 3.5% QoQ (v/s our estimate of US$1172m and guidance of US$1,162m-1,183m). Constant currency revenue grew by 4.7% QoQ. IT services EBIT margin was up 60bp QoQ at 24.2% (v/s our estimate of 22.6%). Consolidated EBIT margin was at 19.1% (v/s 18.9% in 3QFY10 and our estimate of 18.4%). SGA as a percentage of sales increased from 12.2% to 12.6% (v/s our estimate of 12%). Higher other income at Rs 1.7b (vs our estimate of Rs1.3b), led to a higher effective tax rate of 20.2% (v/s our estimate of 16.1%). PAT was Rs12.1b, up 1% QoQ (v/s our estimate of Rs12.4b). FY10 EPS was Rs31.2 (up 18% YoY)

Wipro guided 1QFY11 growth of 2-4.2% QoQ (v/s Infosys guidance of 2.6%-3.4% QoQ). The company expects to add 11,000-12,000 freshers in FY11 in its IT business. Wipro expects broad-based growth and early signs of recovery in discretionary demand.

To read the full report: WIPRO