Wipro Q4fy09 Result Update

Wipro Technologies

Research

Delivers in line but red flags still up

Result Update

Emkay 23 April’ 2009

Delivers in line on revenues, margin resilience driven by lower SG&A expenses

REDUCE Price Rs 282

Target Price Rs 240

Sensex

10,818

Price Performance (%)

1M

3M

6M

12M

Absolute

18

24

1

(35)

Rel. to Sensex

3

4

(5)

1

Volume decline sharpest amongst peers at ~6.3% QoQ as weakness in financial services and telecom clients catches up with the co. See more pressure ahead on this count. Reported Pricing holds firm V/s peers because of higher fixed proportion of business (up~900 bps YoY) but reflects in lower volumes/lower realizations Do not share similar optimism as co management which is in stark contrast to peers as we believe that the lagged effects of weakness for financial services, manufacturing will start reflecting going forward Upgrade FY10/FY11E EPS by ~3%/2% on exchange rate resets to Rs 23.8 and Rs 24.4 respectively.

Source: Capitaline

Maintain Reduce with a revised target price of Rs 240 (V/s Rs 220 earlier)

Q4FY09 Results; Delivers in line Stock Details Sector Reuters Bloomberg

IT Services WIPR.BO WPRO@IN

Equity Capital(Rs mn) Face Value(Rs) 52 Week H/L

2928 2 538/182

Market Cap(Rs bn//US$ mn)

412/8,184 Daily Avg Volume (No of shares) 1682095 .2 Daily Avg Turnover (US$)

7.9

Shareholding Pattern (%) (31st Mar’09) Promoters

Wipro reported revenues in line with estimates at US$ 1046 mn (down ~5% QoQ, +1.4% YoY). EBIT margins at 17.7% expanded by an impressive 190 bps sequentially helped by tighter cost controls however driven majority by cuts in SG&A expenses (down by ~140 bps QoQ). Net profits at Rs 9073 mn (+1% QoQ, +3.3% YoY) beat estimates marginally. However we are surprised by the steep decline in volumes at ~12% QoQ onsite and ~4% QoQ offshore which in our view is driven by sharp ramp downs at major financial services and telecom clients.

79.3

FII/NRI

8.6

Institutions

2.0

Private Corp.

3.3

Public

6.8

Reported pricing vols/utilization??

holds

up,

isn’t

the

cut

reflecting

in

lower

Wipro’s reported pricing ( offshore price realizations down 0.1% QoQ while onsite price realizations up ~0.8% YoY) held up well as compared to much steeper declines for other peers like Infy and TCS (Infy blended pricing down by ~3% QoQ and ~2% QoQ dip for TCS). However we note that actual realization pricing cut may continue to be not reflected in the reported realization metric but show up in lower volumes and lower utilization as a T& M engagement gets converted into a fixed price engagement. Thus in our view some of the pricing pressures being witnessed by Indian IT companies will rather show up in the form of lower volumes for Indian IT companies.

Management appears optimistic but admits to macro weakness as well Wipro management appear confident of business prospects saying that the ‘worst might be behind us’ however admitted that they were facing pressures in the financial services space (with unpredictable project cancellations/ramp downs etc). Revenues from the Telecom and the financial services business declined by ~13%/5% QoQ respectively. We believe that the co would continue to face more macro headwinds from these spaces going forward (a view confirmed by TPI findings released yesterday).

Up FY10/FY11E EPS by ~3%/2%; Maintain REDUCE with TP of Rs 240. Manik Taneja [email protected] +91 22 6612 1253

Emkay Research

We have cut our FY10/FY11 US$ revenue estimates marginally and reset our avg estimates at US$/INR of Rs 48.25/Rs 46.25 for FY10/FY11respectively which leads to an upward revision in FY10/FY11E EPS by ~3%/2% respectively to Rs 23.8 and Rs 24.4 respectively ( V/s Rs 23.1 and Rs 23.8 earlier). We maintain REDUCE with a revised target price of Rs 240, based on 10x 1 year rolling forward multiple.

23 April, 2009

1

Financials

Wipro

Result Update

In Rs mn

Q3FY09E

Q2FY09

QoQ(%)

Q3FY08

YoY(%)

Net sales

65,460

65,387

0.1%

55,954

17.0%

Total Income Operating expenses

65,460

65,387

53,472

54,707

EBITA

11,988

10,680

18.3

16.3

Margins (%) Amortization

55,954 46,099 12.2%

9,855

404

362

11,584

10,318

Margins (%)

17.7

15.8

Interest Paid

0

0

0

Other income

(1,080)

41

235 9,898

EBIT

192 12.3%

9,663

Pre-tax profit

10,504

10,359

1382

1364

1095

Profit after tax

9,122

8,995

8,803

Minority Interest

49

16

9,073

8,979

6.2

6.2

EPS, Rs

19.9%

17.3

Tax provided

Emkay Net profit

21.6%

17.6

16 1.0%

8,787

3.3%

6.0

Source: Company, Emkay Research

QoQ change

Wipro has done well on the reported pricing front. However pricing concessions reflecting in the form of lower utilizations/ lower volumes

Infosys

TCS

YoY change Wipro

Infosys

Volume growth

-1.4%

-2.7%

-6.3%

Con currency pricing change

-2.1%

-2.0%

-0.5%

(60)

(20)

Utilization change(in bps)

TCS

Wipro

9.2%

7.0%

-0.9%

(260)

(170)

60

(130)

HC growth

1.7%

3.5%

0.9%

15.0%

17.6%

2.3%

EBIT change( in bps)

(236)

(106)

192

43

138

43

Our revised earnings estimates FY10E ( All fig in Rs mn except EPS)

FY11E

Old

New

% change

Revenues

261,381

269,199

3.0

282,074

285,945

1.4

EBITA

38,846

42,474

9.3

41,045

46,227

12.6

Net profits

33,629

34,661

3.1

34,693

35,488

2.3

23.1

23.8

3.1

23.8

24.4

2.3

EPS

Old

New

% change

Source: Company, Emkay Research

Emkay Research

23 April 2009

2

Financials

Wipro

Result Update

Income Statement Y/E, Mar (Rs. m) Net Sales

Balance Sheet FY08

FY09E

FY10E

FY11E

197,428

254,564

269,199

285,945

Equity share capital

29,364

31,955

31,955

31,955

29

6

6

Reserves & surplus

99,990

118,228

150,031

183,452

(203,659)

(217,077)

(231,007)

29

7

6

39,647

50,905

52,122

54,938

28

2

5

20.1

20.0

19.4

19.2

Growth (%) Total Expenditure

(157,781)

Growth (%) EBIDTA Growth (%) EBIDTA %

Y/E, Mar (Rs. m)

Minority Interest Networth Secured Loans Unsecured Loans Loan Funds

Other Income

2,450

(2,647)

(1,140)

(540)

Depreciation

(5,959)

(8,239)

(9,647)

(10,511)

EBIT

33,688

42,666

42,474

44,427

-

-

-

-

EBT

36,138

40,019

41,334

43,887

Less: Depreciation

Tax

(3,873)

(5,422)

(6,613)

(8,338)

EAT

32,265

34,597

34,721

35,548

7

0

2

EAT (%)

16.3

13.6

12.9

12.4

Current Assets

Minority Interest

(24)

(99)

(60)

(60)

Inventories

32,241

34,498

34,661

35,488

Interest

Growth (%)

Net Profit after MI

Deferred Tax Liability Total Liabilities

FY09E

FY10E

FY11E

114

235

235

235

129,468

150,418

182,221

215,642

43,732

55,387

55,387

55,388

-

-

-

-

43,732

55,387

55,387

55,388

2,098

4,023

4,023

4,023

175,298

209,828

241,632

275,053 67,106

Goodwill

51,423

67,106

67,106

Gross Block

47,837

63,837

73,837

83,837

(21,559)

(28,310)

(36,157)

(44,869)

Net block

26,278

35,527

37,680

38,968

Capital WIP

13,544

14,334

14,334

14,334

Investment

16,506

18,188

18,188

18,188

115,961

151,585

190,494

225,873

7,172

8,686

9,588

10,184

Sundry debtors

47,213

60,060

68,590

75,208

Cash & bank balance

39,270

49,118

73,227

94,260

Loans & advances Other current assets

3,214

6,681

8,113

10,968

19,092

27,040

30,976

35,254

Current Liab & Prov

49,204

80,720

89,979

93,226

Current liabilities

46,193

75,861

84,816

87,742

Provisions Net current assets Misc exps

Cash Flow

FY08

3,011

4,859

5,163

5,484

66,757

70,865

100,515

132,647

-

-

-

-

Deferred Tax

790

3,808

3,808

3,808

Total Assets

175,298

209,829

241,632

275,052

FY09E

FY10E

FY11E

FY08

FY09E

FY10E

FY11E

Key ratios

FY08

Net Profit after Tax

32,241

34,498

34,661

35,488

EPS (Rs)

22.4

23.7

23.8

24.4

Add : Depreciation

5,959

8,239

9,647

10,511

CEPS (Rs) Book Value Per Share (Rs)

26.6

29.4

30.4

31.6

90.1

103.3

125.2

148.2

(37,418)

(4,108)

(29,651)

(32,132)

6.1

4.0

4.0

4.0

PER

12.6

11.9

11.8

11.6

P/CEPS

10.6

9.6

9.3

8.9

3.1

2.7

2.2

1.9

Add : Misc exp w/off Net changes in WC Operational Cash Flows Capital expenditure Investments Investing Cash Flows

47,612

55,151

38,827

34,962

(55,294)

(33,961)

(11,800)

(11,800)

-

-

-

-

(55,294)

(33,961)

(11,800)

(11,800)

Borrowings

14,064

3,988

-

-

dividend paid

(10,254)

(6,807)

(6,807)

(6,807)

768

(6,206)

3,949

4,739

Issue of shares Share Premium Financing Cash Flows

-

-

-

-

4,668

(11,704)

(3,378)

(2,588)

Dividend Per Share (Rs) Valuations Ratios (x)

P/BV

10.4

8.2

7.5

6.1

EV/Sales

EV/EBIDTA

2.1

1.6

1.5

1.2

M-Cap/sales

2.1

1.6

1.5

1.4

Profitability Ratios (%)

changes in cash

(3,014)

9,486

23,649

20,574

RoCE

27.0

26.7

22.4

20.0

Opening balance

19,650

39,270

49,118

73,227

RoNW

27.9

24.7

20.8

17.8

Closing balance

39,270

49,118

73,227

94,260

EBITDA Margin

20.1

20.0

19.4

19.2

EBIT Margins

17.1

16.8

15.8

15.5

Net Profit Margin

16.3

13.6

12.9

12.4

Emkay Research

23 April 2009

3

Financials

Wipro

Result Update

DISCLAIMER: This document is not for public distribution and has been furnished to you solely for your information and may not be reproduced or redistributed to any other person. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. No person associated with Emkay Global Financial Services Ltd. is obligated to call or initiate contact with you for the purposes of elaborating or following up on the information contained in this document. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon. Neither Emkay Global Financial Services Ltd., nor any person connected with it, accepts any liability arising from the use of this document. The recipient of this material should rely on their own investigations and take their own professional advice. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. We and our affiliates, officers, directors, and employees world wide, including persons involved in the preparation or issuance of this material may; (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company (ies) discussed herein or may perform or seek to perform investment banking services for such company(ies)or act as advisor or lender / borrower to such company(ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. The same persons may have acted upon the information contained here. No part of this material may be duplicated in any form and/or redistributed without Emkay Global Financial Services Ltd.'s prior written consent. No part of this document may be distributed in Canada or used by private customers in the United Kingdom. In so far as this report includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.

Emkay Global Financial Services Ltd., Paragon Center, H -13 -16, 1st Floor, Pandurang Budhkar Marg, Worli, Mumbai – 400 013. Tel: +91-22-66121212, Fax: +91-22-66242410

Emkay Research

23 April 2009

4