Wipro - Strong Programming

After Infosys declared its FY12 results and gave out a weak guidance for FY13, it would certainly come as a surprise to many that we are recommending Wipro as our Choice Scrip this fortnight. The Infosys guidance suggests that IT companies are unlikely to perform better, and hence, investors are likely to show a lesser fancy for this sector. So, why Wipro?

The principle reason why we are bullish on Wipro is that this company will now start reaping the benefits of the restructuring it undertook a couple of years ago. This has already begun attracting investors towards this counter, which has seen some smart money move into it. Wipro has been an outperformer, the stock having gone 5.58 per cent on a Year-To-Date basis. Against this, TCS has actually declined by 7.83 per cent, while Infosys is down by 14.56 per cent. We strongly believe that this outperformance would continue for the rest of the year.

After its restructuring exercise, wherein it reshaped its business strategy, the company’s client mining efforts have yielded impressive results so far. The number of active clients in December 2011 went up by 39, taking the total tally of active clients to 953. Further, the number of clients yielding more than USD 100 million in revenues on a trailing 12-month (TTM) basis increased to six, from only one a year ago. A key point to note while considering this stock is that Wipro is a company that has been able to meet its guidance consistently, and this fact enhances the comfort level with this stock.

After Infosys declared its FY12 results, the IT stocks have been beaten down badly. We believe that all the negatives are now already priced in. The US economy is showing some signs of improvement, and a better economic situation would mean bigger budgets for IT companies. This could benefit Wipro, as the US market accounts for 53 per cent of its revenues. We believe that any positive surprise would put Wipro on a higher growth trajectory, and hence, one should go against the overall market sentiment in this case, as it will help create a better alpha.

• The benefits of a restructuring process it undertook two years ago will start coming in now.
• The company has been able to meet its guidance consistently, which enhances the comfort level with this stock.
• The US economy showing signs of improvement would mean bigger IT budgets. This could benefit Wipro, as the US market accounts for 53 per cent of its revenues.

*CMP as on Apr 17, 2012

While these are the fundamental points that put the stock on a strong footing, there are also some other factors that add strength to our conviction in Wipro. The company has six verticals, five of which have managed to post growth in the December 2011 quarter. The management has stated that although the spends are expected to be flattish, it is expecting a broad-based growth in most of its verticals.

On the other hand, there is one concern that needs to be looked at. Pricing pressure and a lower utilisation rate of around 74 per cent has squeezed margins. However, we believe that a lower utilisation rate offers greater room for any positive surprises that may come its way, wherein the company can better utilise its bench strength. Of course, an improvement in pricing will be an added advantage.

On the financial front, it has posted a topline of Rs 27381 crore and a bottomline of Rs 4092 crore for 9MFY12 as against Rs 22783 crore and Rs 3922 crore in 9MFY11. The consensus EPS for FY 2012 is at Rs 23.20, and we believe that there would be no nasty surprises in Wipro’s results like those from Infosys. The current valuation gives a P/E of 18.23x, which we believe has a good scope for capital appreciation. We expect Wipro’s share price to touch around Rs. 500 by next April with less of a downside risk, and hence suggest adding the stock to your portfolio.