Neutral on Wipro - Motilal Oswal

Wipro (WPRO IN; Mkt Cap USD21.5b, CMP Rs412, Neutral)

Wipro 1QFY11 EBIT margins and PAT were ahead of our expectations, though marginally lower on revenue. 2QFY11 US$ revenue growth guidance of 4.1-6.1% QoQ was higher (v/s est. of 4-5% QoQ). Key highlights are:

Volume growth was in line at 4.7% QoQ, but pricing decline of 4.9% onsite and 1.4% offshore was a negative. US dollar revenue growth of 3.2% QoQ (v/s est. of 3.7% QoQ and guidance of 2-4.2% QoQ) was lower than Infosys (4.8% QoQ) and TCS (6.4% QoQ). Package Implementation (9.7% QoQ) and Product Engineering (18.4% QoQ) led growth.

IT EBIT margins surprised (up 30bp at 24.5% v/s est. of a 120bp decline). Key margin determinants were [a] +60bp currency impact (including -40bp cross-currency impact), [b] better profitability in BPO, India M/E and Infocrossing business, and [c] pricing decline (-100bp). EBIT margins improved 40bp QoQ to 19.5% (v/s est. of -40bp at 18.7%).

Margin pressures ahead due to elevated attrition (23%) leading to RSU charges, promotion impacts (~20,000 people in the 3-7 year bracket), and adverse hedging impacts on revenue; expected to impact IT EBIT margins by 100bp.

PAT at Rs13b (excluding write-backs of Rs182m) grew 7.5% QoQ (v/s est. PAT of Rs12.1b) due to better margins, lower tax (16.2% v/s est. of 19%) and higher other income of Rs1.4b (v/s est. of Rs1b).

Our estimates are unchanged after the results, with impacts of higher wage inflation expectations (13% offshore v/s 7% earlier) countered by curtailments in non-staff costs in 1QFY11 and lower effective tax rate expectations for FY11 (18% v/s 19% earlier). We expect Wipro to post US$ revenue growth of 19% CAGR and EPS growth of 13% CAGR over FY10-12. Maintain Neutral, with a target price of Rs455, based on 19x FY12E. We prefer Infosys among large-cap IT companies.

Source : Equity Bulls

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