CMP: INR415 TP: INR 471 BUY

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1 04 Mar 2013 Update Sector: Technology Wipro CMP: INR415 TP: INR 471 BUY Pipeline and deal signings suggest improvement in growth; Multiple levers and focus on productivity will cushion margin headwinds (WPRO IN, Mkt Cap USD19b, CMP INR415, TP INR471, 13% upside, Buy) Post restructuring, Wipro has put right multiple factors held responsible for holding back growth earlier: [1] Increase in SGA (up 200bp in 5 quarters), [2] Drop in utilization (down 770bp in 10 quarters) to be able to cater to any improvement in demand, and [3] Improvement in client mining (number of USD100m+ clients up from 1 to 10 in two years). We are not very concerned about lower volume growth and agree with the thrust on productivity. We note that this is not a new focus; and even in 4QFY11, the company spoke of its focus on driving productivity, which would consequently show in softer volumes. We believe that revenue growth should improve going forward on the back of: [1] Better pipeline with improvement in deal closure rates and [2] Ramp ups in deals won in 2Q and 3QFY13, which saw healthy deal activity. The company has continued to investment even in the lean period to ensure it is growth ready this time around. As growth returns, utilization will be a key margin lever and will help cushion any headwinds on margins, along with productivity. Valuation and view Wipro s de merger of non IT business was long overdue and is a positive in multiple respects: [1] Valuation assigned to respective businesses are not detrimental to the minority shareholders interests, [2] Improves RoCE of the business by over 3pp (after proportionately allocating reconciling items, RoCE would have been 24.4% / 23.4% in FY11 / FY12, +3.5pp / 3.2pp), and [3] Focus on the IT Services. Higher returns on employed capital and greater transparency into the IT business, both make a potential rerating case for Wipro. We expect Wipro to grow its USD revenues at 10% CAGR and EPS at 8% CAGR of 8% over FY The stock trades at 15x FY14E and 13.3x FY15E EPS. Buy with a target price of INR471 (15x FY15E EPS). RoCE improves by 3pp+ post the demerger, going by returns in FY11 and FY12 1

2 Multiple changes amid heavy restructuring have put right a series of factors that were limiting growth Wipro s revenue growth in the past quarters lagged peers, despite productivity gains, as volume growth has been even weaker. As a result the stock continues to trade at a significant discount to peers such as Infosys and TCS. In our opinion, post restructuring, the company has put right some of the factors that were holding growth back earlier: [1] Increasee in SGA (up 200bp in 5 quarters) in its effort to chase growth, [2] Drop in utilization (down 770bp in 10 quarters) to be able to cater to any improvement in demand, and [3] improvement in client mining (number of USD100m+ clients up from 1 to 10 in two years. Investments in SGA increased, will remain high as the company Utilization is at a historical low implying growth readiness, and growth continues to chase growth could drive uptick in margins

3 Impetus on mining reflected in the increase in USD100m+ client bucket Range of new client additions up at ~40 55 from earlier Volume growth has been a cause for concern, but worries alleviated by productivity gains In the last 9 quarters, Wipro s QoQ volumes have grown above 2% in only one quarter and have been decelerating in the past five quarters. Underperformance in this metric has been one of the key factors of disappointment. However, we are not very concerned about Wipro s lower volume growth and agree with the management s thrust on productivity. This is not a new focus and even in 4QFY11, the company spoke of its focus on driving productivity, which would consequently show in softer volumes. We believe that given persistent pricing pressures in the traditional services, the industry will follow suit sooner than later. Weak volume growth partially cushioned by productivity improvement in last two quarters Revenue growth should improve going forward on better pipeline and deal signings Healthy pipelines, improvement in deal signings and outlook of sustained momentumm increase expectations of growth revival While the macro has largely remained the same, pipeline has built up significantly over the past 12 months. Decision cycles of clients have not shortened during this period and remain sluggish, but Wipro has managed to

4 convert a greater proportion of its pipeline, especially in the past couple of quarters. It expects the momentum to continue into the next quarter. Better deal closures in the past couple of quarters and confidence in healthy pipeline are the key hopes for growth acceleration in FY14. We are currently modeling USD revenue growth of 9.3% in FY14 and 10% in FY15, up from 5.4% estimated in FY13. Levers of utilization and productivity will help cushion any headwinds to margins Over the past 6 quarters, Wipro s IT Services EBIT margins have remained in a tight band of 20 21% despite margin levers from currency gains and productivity benefits. Offsets to tailwinds on margins came from [1] wage hikes, [2] lower utilization and [3] investments in SGA. We agree with the company s approach of staying invested through both technical resources and sales feet in a weak environment, in order to be prepared for growth. We expect Wipro to sustain its margin band in the near to medium term given the levers of: [1] Productivity, with further scope in the run the business (RTB) segment, and [2] Utilization, which is at the lowest levels historically. 04 Mar

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