|
Comparative Analysis
|
|
|
FY12
|
Unit
|
Wipro
|
Infosys
|
TCS
|
|
|
|
Current market price (Rs)
|
|
379
|
2,293
|
1,258
|
|
|
|
Market Cap (Rs m)
|
|
931,048
|
1,318,926
|
2,463,553
|
|
|
|
Revenues
|
Rs m
|
371,878
|
337,340
|
488,938
|
|
|
|
EBITDA margin
|
%
|
18.9%
|
31.8%
|
29.5%
|
|
|
|
Net profit margin
|
%
|
15.1%
|
24.7%
|
21.3%
|
|
|
|
ROIC
|
%
|
30.0%
|
24.9%
|
39.6%
|
|
|
|
Return on equity
|
%
|
22.6%
|
29.1%
|
37.8%
|
|
|
|
Price to earnings
|
TTM, x
|
13.7
|
14.0
|
19.5
|
|
|
|
Investment Concerns
|
|
|
Growth
has been lagging the industry: Wipro has been lagging its peers
TCS, HCL Tech and even Infosys in terms of volume growth. The Company
has reported less than 2% QoQ volume growth in seven of the last eight
quarters, although the growth never fell to the negative territory as
was observed in the case of Infosys. The QoQ volume growth has been the
lowest at the rate of 0.2% in 2QFY13. However, as we have pointed out
the accrued deals in Wipro's kitty should deliver in terms of volume
growth sooner than later. While Wipro was facing pricing pressures as
well, the picture improved over the last couple of quarters as there was
realization improvement due to pricing improvement and efficiency
drives.
Delay
in spending decisions: Global clients are still cautious on
discretionary IT spends and Wipro like its peers in the industry has
not been spared. Clients are still cautious in opening up long term
projects and the environment continues to be volatile. As a result,
there could be delays in spending decisions which would affect the
Company adversely.
IT
Products could continue to pull down the performance of the demerged
entity:
While the margin profile and return ratios for the IT business as a
whole is much higher as compared to the entity with IT and non IT
businesses, the margin profile would have been further improved if
Wipro only had an IT services segment. The operating profit (EBITDA)
margin of the IT services segment averaged 22% between FY09 and FY12,
while the EBITDA margin of the combined IT services and products
segments averaged 19.5% between FY09 and FY12.
Risks
in BFSI vertical could prove to be challenging: Given the
global financial crisis since the beginning of FY10, growth in Banking,
Financial Services and Insurance (BFSI) vertical continues to pose a
challenge for all the IT vendors. While Wipro's share of revenues from
the BFSI vertical stands lower at 27% (2QFY13) as compared to its
larger peers, it still is a sizeable chunk. Thus the Company's growth
fortunes are dependent on the outlook, performance and decision making
of the BFSI clients.
|
![]( "Rupee dollar rate")
|
Currency
risks:
Most Indian IT companies would agree to the fact that the rupee/dollar
volatility is one of the biggest risks to their financial performance.
This has become even more prominent in recent times given the sharp
volatility seen in this rate over the past few years. This is something
that is beyond the control of the companies. Given India's twin
deficits in both the current account and fiscal account, the volatility
has been witnessed with respect to Pound Sterling and Euro as well.
This is despite the fact that the economic situation in Continental
Europe is wary. With around 90% of Wipro's billing in foreign currency,
Rupee's volatility is a large risk for the company as well.
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Background
|
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|
Wipro
is India's third-largest software services exporter and as on the date
of this report also has diversified business interests, which include
software development, hardware, consumer care and lighting and
Infrastructure engineering. The Company began its swift transformation
from a predominantly hardware company to a software services company in
FY99. Since then, the contribution of Wipro's IT services business, has
been consistently on the rise and has been the major driver of revenue
and profit growth.
IT
products and services business has contributed around 86% of total
revenues of the company in FY12. During the period FY07-12, the IT
Services sub segment has grown its sales at an annual average rate of
21% while the IT Products sub segment has grown its sales at an annual
average rate of 10%.
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|
Industry prospects
|
|
|
The
current macroeconomic environment continues to pose significant short
and medium-term challenges to the growth of IT companies worldwide and
in India. As per Gartner, the world's biggest technology research
company, global IT spending is expected to reach US$ 3.8 trillion in
2013. According to Nasscom (a premier organization that represents and
sets the tone for public policy for the Indian software industry), the
Indian IT sector will grow by 11-14 % in the current financial year.
The
key for growth and outperformance in the IT industry is to offer
innovative service offerings and ability to respond quickly to changes
in demand. In the long run, factors like the growing impact of
technology-led innovation and need for mobility will continue to lead the
increasing demand for global sourcing of IT services and products. The
segment poised for stellar growth is expected to be the global sourcing
or off-shoring segment. This is based on the fact that it currently
forms just around 5-6% of the total worldwide technology spend. At the
same time there is an urgent need for corporations to cut costs.
Especially in the tough macroeconomic environment that the global
economy and corporates are currently facing. Therefore technology
off-shoring market both for IT products and services is expected to
outpace growth in total off-shoring spends.
Though
the Indian IT industry might take some time to return to pre-downturn
growth rates, it has a strong chance to grow at an average rate of more
than 20% for the next 5-10 years. However, the industry is plagued by
the concerns on adverse currency fluctuations as well as rising costs.
It has also faced serious competition from other cost effective
outsourcing destinations like Philippines and Vietnam. Further the
current negative sentiment and political opposition prevailing in the
US with regard to outsourcing do not bode well for the sector in the
short term.
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Key management personnel
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|
|
Mr.
Azim Premji, Chairman and Managing Director, has led
Wipro since 1966. He plays a key role in defining the company
strategy. He has received several honors and accolades including the
Faraday Medal. He is a graduate in electrical engineering from
Stanford University, USA.
Mr.
T K Kurien, the Chief Executive Officer (IT Business), is a
Chartered Accountant by qualification. Mr Kurien has got over 27
years of global diversified experience. He has been with Wipro for
the last 10 years. Prior to taking over the role as CEO of the IT
business, in Feb 2011, Mr. Kurien was President of Wipro's recently
launched Eco Energy business. He has served the company in various
capacities and in different departments such as Wipro Consulting
Services, Wipro BPO and Wipro's Healthcare & Life Sciences. He
has been instrumental in building and scaling many of Wipro's
businesses successfully. He played an instrumental role in turning
around the various businesses within the company including the BPO,
Media, Telecom and Consulting businesses.
Mr.
Suresh C. Senapaty, Chief Financial Officer (CFO): Mr.
Senapaty heads Legal, Business Planning, Treasury and Controllership.
His association with Wipro goes back to Wipro Consumer Care where he
was the CFO. He later became the Vice President Finance of Wipro
Infotech. He moved to his present role as CFO, Wipro Corporation in
1995. He played a key role in the New York Stock Exchange Listing of
Wipro in 2000. Mr. Senapaty holds a B. Com. from Utkal University in
India, and is a Fellow Member of the Institute of Chartered
Accountants of India.
|
Risk
Analysis
|
|
|
Sector: The
Indian IT sector is largely dependent on the developed world, viz.
US, Continental Europe and the UK for growth. As we know, the US
economy is still reeling under the huge budget deficit and debt crisis
along with slow economic growth. The conditions in Continental
Europe and the UK in terms of economic growth are very much similar
to that of the US. Although offshoring as a concept is continuing
to witness increasing acceptance worldwide, it is facing some
political opposition in the US. Based on these factors, we have
assigned the sector a 'medium' risk rating.
Company
standing:
Wipro is India's third largest software services exporter and has
presence across a wide spectrum of technology offerings like
application development and maintenance, consulting and package
implementation, BPO and products. In the past, the company has
managed a strong rate of growth in sales and profits over the years
in its IT services and products segments. Post the demerger the
drag of the non IT business on the performance of Wipro as has been
witnessed in the past would be non-existent. Thus we have assigned
a strong rating to the company.
Sales: Wipro
earned average annual revenue of about Rs 195 bn between FY07 and
FY12 from its IT services business and grew at a CAGR of 17% during
this period. The IT products business generated average annual
revenue of around Rs 33 bn during the same period and grew at a
CAGR of 8%. We expect the combined IT business post the demerger to
grow at a CAGR of 9% between FY12-15. As such, we assign the stock
a rating of 6.
Operating
(EBITDA) margin: Operating (EBITDA) margin
measures the profitability of a company's business. A healthy
margin helps a company to comfortably pay its fixed costs, such as
interest on debt. The higher the margin, the better it is for the
company. It indicates better operating efficiency. Based on segment
disclosures, we found out that the IT business of Wipro had an
average operating margin of 20% between FY09 to FY12. We expect
EBITDA margin to average around 19% between FY13 to FY15. We assign
a rating of 7 to the stock.
Long-term
EPS growth: We expect Wipro's net profits (without
considering other income, including foreign exchange gains and
losses) to grow at an annual average of 16% between FY12 to FY15.
We consider annual average growth of over 20% in net profits as
healthy for a company. The rating assigned to the stock on this
factor is 6.
Return
on capital invested (ROIC): ROIC helps assess how well the
management allocates capital into its operations for future growth.
ROIC of above 15% is decent for companies that are in a growth
phase. Wipro, on the back of its consistently strong profitability,
has earned high ROIC. However, in recent times, its ROIC has been
declining from 56% in FY06 to 30% in FY12. Post demerger, we expect
the same to average around 26% between FY13 and FY15. The rating
assigned is 6.
Dividend
payout:
A stable dividend history inspires confidence in the management's
intentions of rewarding shareholders. Wipro's payout has averaged
around 23% over the past five years and we expect it to remain the
same between FY13 and FY15. The rating thus assigned is 5.
Promoter
holding:
A larger share of promoter holding indicates the confidence of
people who run it. We believe that a greater than 40% promoter
holding indicates safety for retail investors. A partial objective
of the demerger exercise was to bring down the promoter holding
from around 79% to the mandatory 75% at the end of June 2013. That
would still be a very high percentage and accordingly we have
assigned a rating of 9 to the stock on this parameter.
FII
holding:
We believe that FII holding of greater than 25% can lead to high
volatility in the stock price. FII holding in Wipro at the end of
September 2012 stood at around 6.5%. Therefore, the rating assigned
is 9.
Liquidity: The
average daily trading volume in Wipro's stock over the past one
year (52-weeks) has been high at around 1.5 m shares (combined volumes
on BSE and NSE). This indicates the high level of liquidity in the
stock. The rating assigned is 10.
Current
ratio:
We have taken the last five years' data for calculating this ratio.
Wipro's average current ratio during the period FY08 to FY12 has been
around 2 times and during our projection period, FY13-15, we expect
the ratio to stand at around 2.5. This indicates that the company
has a reasonably comfortable ability to pay off its short-term
obligations. We assign a rating of 6.
Debt
to equity ratio: A highly leveraged business is
the first to get hit during times of economic downturn, as
companies have to consistently pay interest costs, despite lower
profitability. We believe that a debt to equity ratio of greater
than 1 is a high-risk proposition. Wipro was a net cash company in
FY12 and our projections indicate the same status between FY13 and
FY15. Accordingly, we have assigned a rating of 9 to the stock.
Interest
coverage ratio: It is used to determine how comfortably a
company is placed in terms of payment of interest on outstanding
debt. The interest coverage ratio is calculated by dividing a
company's earnings before interest and taxes (EBIT) by its interest
expense for a given period. The lower the ratio, the greater are
the risks. Given Wipro's low debt status, the interest coverage
ratio for Wipro stands at comfortable levels. The rating assigned
on this parameter is 9.
P/E
Ratio:
The P/E ratio (price-to-earnings ratio) of a stock is a measure of
the price paid for a share relative to per share income or profit
earned by the company. This is one of the important metrics to
judge the attractiveness of a stock, and thus gets the highest
weightage in our risk matrix. Wipro's P/E on its trailing 12-months
earnings stands at 15.3 times. As such, we have assigned a rating
of 4 to the stock on this parameter.
Considering
the above analysis, the total ranking assigned to the company is
86. On a weighted basis, it stands at 6.9. This makes the stock a
medium-risk investment from a long-term perspective.
|
|
Risk
Matrix
|
|
|
|
|
Rating accorded
|
|
|
Rating
|
Weightage* (A)
|
Rating# (B)
|
Weighted (A*B)
|
|
|
Sector risk
|
-
|
Medium
|
NA
|
|
|
Company's standing
|
-
|
High
|
NA
|
|
|
Performance
parameters
|
|
|
|
|
|
Sales
|
5.0%
|
6
|
0.3
|
|
|
Operating (EBITDA)
margin
|
5.0%
|
7
|
0.4
|
|
|
Long term EPS growth
|
10.0%
|
6
|
0.6
|
|
|
Return on invested
capital
|
10.0%
|
6
|
0.6
|
|
|
Technical
parameters
|
|
|
|
|
|
Dividend payout
|
5.0%
|
5
|
0.3
|
|
|
Promoter holding
|
10.0%
|
9
|
0.9
|
|
|
FII holding
|
5.0%
|
9
|
0.5
|
|
|
Liquidity
|
10.0%
|
10
|
1.0
|
|
|
Safety
parameters
|
|
|
|
|
|
Current ratio
|
5.0%
|
6
|
0.3
|
|
|
Debt to equity ratio
|
10.0%
|
9
|
0.9
|
|
|
Interest coverage ratio
|
5.0%
|
9
|
0.5
|
|
|
P/E ratio
|
20.0%
|
4
|
0.8
|
|
|
Final
Rating**
|
|
86
|
6.9
|
|
#
Rating has been assigned on the basis of the company's performance
over the past five years and expected performance over the next 3 to
5 years. Rating is on a scale of 1 to 10, with 1 indicating highest
risk and 10 indicating lowest risk. * 'Weightage' indicates the
relative importance in percentage terms of the parameter. For
instance, for an investor, given all the performance metrics, return
on equity should be the foremost criteria for buying/not buying
stocks. ** The final rating has been arrived at by multiplying the
rating/points given on each parameter with the respective weightage.
|
Valuation
rationale
|
|
|
At
the current price of Rs 379, Wipro's stock is trading at a
multiple of 13.8 times our estimated FY15 earnings (considering
only IT business).
Based
on the terms of the demerger, Wipro Ltd's existing shareholders
would have the following options:
- Receive one
equity share with a face value of Rs 10 in Wipro Enterprises
Ltd. (the demerged undertaking comprising of non IT
businesses) for every five equity shares with a face value
of Rs 2 each in Wipro Ltd. that they hold; or
- Receive one 7%
Redeemable Preference Share in Wipro Enterprises Ltd., with
a face value of Rs 50 for every five equity shares of Wipro
Ltd. that they hold; or
- Exchange the
equity shares of Wipro Enterprises Ltd. and receive as
consideration equity shares of Wipro Ltd. held by the
promoter. The exchange ratio will be 1 equity share in Wipro
Ltd. for every 1.65 equity shares in Wipro Enterprises Ltd.
Each
Redeemable Preference Share shall have a maturity of 12 months
and shall be redeemed at a value of Rs 235.20.
Assuming
each of the above options should in theory give investors the
same explicit benefit, we did a total return analysis taking
option (2) into account. Our calculations indicate that an amount
of Rs 48 would accrue to an investor on account of the redemption
of preference share associated with one share of Wipro Ltd. (pre
demerger). After taking this return into consideration with our
FY15 Target Price of Rs 497 ( only IT business), an investor can
expect a point to point return of around 45% from the current
levels by FY15 and a CAGR upside of around 18%. We thus recommend
a 'Buy' on the stock at current prices. However, we would suggest
our subscribers not to increase the weighting of Wipro's shares
in their portfolio beyond 5%
|
|
|
Target
Price and other returns
|
|
|
|
Rs
|
|
|
|
|
|
|
EPS
(FY15 E)
|
27.59
|
|
|
|
|
|
|
FY15
Target Price based on above (A)
|
497
|
|
|
|
|
|
|
Value
of Redeemable Preference Shares per share of Wipro Ltd (B)
|
47.04
|
|
|
|
|
|
|
Dividend
on Redeemable Preference Share ( C)
|
0.7
|
|
|
|
|
|
|
Total
value accrued on account of Redeemable Preference Share (B+C)
|
47.74
|
|
|
|
|
|
|
Valuations
|
|
|
(Rs
m)
|
FY12
|
FY13E
|
FY14E
|
FY15E
|
|
|
|
Revenue
(Rs m)
|
322,749
|
382,652
|
421,188
|
462,329
|
|
|
|
Net
profit margin
|
16.0%
|
14.4%
|
14.6%
|
14.7%
|
|
|
|
EPS
(Rs)
|
21.0
|
22.4
|
25.1
|
27.6
|
|
|
|
Return
on equity
|
22.6%
|
22.2%
|
21.3%
|
20.2%
|
|
|
|
Price
to earnings (x)
|
18.1
|
16.9
|
15.1
|
13.7
|
|
|
|
Price
to sales (x)
|
2.9
|
2.4
|
2.2
|
2.0
|
|
|
|
|
(Rs
m)
|
FY12
|
FY13E
|
FY14E
|
FY15E
|
|
|
Sales
|
322,749
|
382,652
|
421,188
|
462,329
|
|
|
|
Sales growth (%)
|
18.8%
|
18.6%
|
10.1%
|
9.8%
|
|
|
|
Operating profit
(EBITDA)
|
61,322
|
72,704
|
80,026
|
87,843
|
|
|
|
Operating profit
margin (%)
|
19.0%
|
19.0%
|
19.0%
|
19.0%
|
|
|
|
Net profit
|
51,512
|
55,073
|
61,571
|
67,777
|
|
|
|
Net profit margin (%)
|
16.0%
|
14.4%
|
14.6%
|
14.7%
|
|
|
|
|
|
|
|
|
Balance
Sheet
|
|
|
|
|
|
|
|
Current assets
|
202,227
|
246,949
|
291,947
|
346,288
|
|
|
|
Fixed assets
|
55,248
|
62,382
|
70,049
|
75,943
|
|
|
|
Investments
|
27,625
|
27,625
|
27,625
|
27,625
|
|
|
|
Goodwill
|
66,777
|
66,777
|
66,777
|
66,777
|
|
|
|
Long term loans &
advances & other current assets
|
30,948
|
30,948
|
30,948
|
30,948
|
|
|
|
Deferred tax assets
|
620
|
620
|
620
|
620
|
|
|
|
Total
assets
|
383,445
|
435,300
|
487,966
|
548,201
|
|
|
|
|
|
|
|
|
Current liabilities
|
93,130
|
105,911
|
114,892
|
127,039
|
|
|
|
Other Long term
liabilities & provisions
|
3,639
|
3,639
|
3,639
|
3,639
|
|
|
|
Net worth
|
228,723
|
267,797
|
311,482
|
359,570
|
|
|
|
Debt
|
57,953
|
57,953
|
57,953
|
57,953
|
|
|
|
Total
liabilities
|
383,445
|
435,300
|
487,966
|
548,201
|
|
|
|
|
|
|
|
