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Summary
of Contents
STOCK
UPDATE
Wipro
Cluster: Apple
Green
Recommendation: Buy
Price target: Rs700
Current
market price: Rs636
Price target revised to Rs700
Result highlights
-
Wipro's global
information technology (IT) service business reported a growth of
6.2% quarter on quarter (qoq) and of 34.1% year on year (yoy) to
Rs2,887 crore. The growth is largely in line with our
expectations. In dollar terms, the revenues grew at a reasonably
healthy rate of 8.8% sequentially to $640.5 million; the growth
was contributed by an 8.9% growth in the IT service business and a
7.1% growth in the business process outsourcing (BPO) business.
The sequential growth in the IT service business was driven by a
9.3% volume growth but the average realisation declined by 0.4%,
resulting in a net growth of 8.9% sequentially. On the other hand,
the sequential growth in the BPO business was purely driven by a
7% improvement in the average realisation with a flat growth in
the volume.
-
In terms of
the operating profit margin (OPM), the adverse impact of the wage
hikes (to part of the offshore work force in September 2006 and to
the remaining in November 2006; a net impact of 180 basis points)
and the rupee appreciation (a negative impact of 80 basis points)
was partially mitigated by the higher employee utilisation, lower
losses in the acquired entities and other cost efficiencies. This
resulted in a net decline of 80 basis points in the OPM of the
global IT service business.
-
The revenue
growth guidance of $685 million for Q4FY2007 implies a healthy
sequential growth of close to 7% in the revenues of the global IT
service business. The guidance does not include any contribution
from the possible inorganic initiatives during the quarter. The
management indicated that the overall outlook for the coming
fiscal is also encouraging.
-
On a
consolidated basis, the revenues have grown by 12.8% qoq and 42.9%
yoy to Rs3,964 crore under the US GAAP. The OPM has declined by
180 basis points to 19.4% on the back of a sequential decline of
80 basis points in the profitability of the global IT service
business and a dip of 40 basis point in the OPM of the Indian IT
service business. However, the sequential jump of 49.6% in the
other income component (boosted partly by the sale of investments)
and a lower tax rate (12.7% as compared with 13.3% in Q2) enabled
the company to report a growth of 7% qoq and of 39.9% yoy in its
earnings to Rs745 crore under the US GAAP.
-
We have
revised upwards Wipro's earnings estimates by 5.1% and 4.3% for
FY2007 and FY2008 respectively. At the current market price the
scrip trades at 31.7x FY2007 and 25.4x FY2008 estimated earnings.
We maintain our Buy call on the stock with a revised price target
of Rs700.
NIIT Technologies
Cluster: Ugly
Duckling
Recommendation: Buy
Price target: Rs474
Current
market price: Rs341
Price target revised to Rs474
Result highlights
-
NIIT Technologies Ltd (NTL) reported a growth
of 5.3% quarter on quarter (qoq) and 47.1% year on year (yoy) in
its consolidated revenues to Rs231.5 crore during the third
quarter. The organic revenues grew at a rate of 5% sequentially
whereas the revenues of Room Solutions (acquired in May 2006) grew
at a relatively highe rate of 7% qoq to Rs29.7 crore.
-
The highlight of the performance was the steep
improvement of 230 basis points in its operating profit margin
(OPM) to 21.2% on a sequential basis. The margin improved in spite
of the adverse impact of the appreciation of the rupee against the
other major global currencies. The improvement was driven by
multiple factors like the absence of the cost related to the
integration and transition of Room Solutions (the same was around
Rs1 crore in Q2), savings in the overhead cost, higher margins in
the business process outsourcing (BPO) business and better
profitability of Room Solutions.
-
The increase in the other income (Rs3.3 crore
as compared with Rs2.4 crore in Q2) and lower depreciation charges
also aided the earnings growth during the quarter. Consequently,
the consolidated earnings grew at an explosive rate of 28.6% qoq
and 91.9% yoy to Rs34.6 crore. This is the second consecutive
quarter of over 20% growth in earnings, which is a commendable
performance in a tough quarter by a mid-sized information
technology (IT) service company.
-
In terms of the outlook, the company is
expected to maintain the growth momentum on the back of the record
order intake of $56 million during the quarter. The pending order
backlog of $95 million (executable over the next one year) is one
of the highest ever reported by the company. The management
expects the margin to also improve with the improving
profitability of the BPO business, the efforts taken to increase
the proportion of the high-margin offshore revenues and other cost
levers like a lower overhead cost. There is enough scope for
further improvement with the overhead cost currently at 20% of its
sales. Consequently, the earnings estimates have been revised
upwards by 20.7% and 18.4% for FY2007 and FY2008 respectively.
-
At the current market price the stock trades at
11x FY2007 and 9.4x FY2008 estimated earnings. We re-iterate our
Buy call on the stock with an upgraded price target of Rs474 (13x
FY2008 earnings).
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