We take this opportunity to reiterate our rating, target and estimates on as follows: fiscal 2007 EPADS of $0.43 on revenue of $3.301 billion (38% YoY growth); fiscal 2008 EPADS of $0.53 on revenue of $4.461 billion (35% YoY growth); and fiscal 2009 EPADS of $0.65 on revenue of $5.902 billion (32% YoY growth). Our estimates imply 35%/23% compound revenue/EPADS growth in calendar 2006-08. In 12-months, our current target price would correspond to 30-35x forward EPADS of $0.62 – a modest discount to the current valuation (35x). Recent price strength can be attributed to strong 3Q07 results – highlighted by growth and profitability in core segments – and a 60% gain in the Sensex since mid-June.
On January 30, Wipro hosted its annual Analyst Day at the New York Stock Exchange. The event featured Chairman Azim Premji, veteran CFO Suresh Senapaty and presentations covering key topics: Business Update, Consulting, Human Resources, Acquisitions and BPO.
Wipro outlined the main elements of its game plan, summarized below.
Organic growth. WIT's organic growth is benchmarked to match or surpass industry leaders. Indian IT + BPO export revenue appears on track to advance from $17.2 billion in fiscal 2005 to $60-80 billion in fiscal 2010 (source: NASSCOM), implying 28-36% compound growth. Segments with momentum include Infrastructure Management and Testing, as well as the Financial Services and Telecom Service Provider verticals. Promising regions include Canada, Latin America, Europe (where Germany and France remain under-penetrated) and Saudi Arabia (450-person JV presence). The near term outlook discounts temporary softness in certain Technology sub-sectors. Leadership across newer service lines such as Infrastructure Management, Testing and BPO. These growth engines should contribute 43% of revenue in fiscal 2007E, up from 8% in fiscal 2001. Larger/integrated business solutions. Management noted a continuing rise in the size, scope and complexity of new engagements. While Wipro derives 69% of its revenue from 163 Global-500/Fortune-1000 clients, the company has rededicated itself “on a war footing” to better mine these relationships. The current pipeline includes seven large opportunities. Wipro is not inclined to pursue transactions that involve excessive asset or people acquisitions. Domain expertise. This is afforded by training, hiring plus the acquisition of ~1,500 specialists in 2006. Acquisitions. Wipro is evaluating increasingly large candidates with revenue of up to $200 million. Recent integration was described as solid but not brilliant although problem areas have been fixed. A case study of Enabler credits success to deep pre-transaction discussions, respect for cultural differences and joint penetration of new markets/clients.
Global footprint. Low-cost centers span China, Vietnam, Romania, Portugal, Brazil and – possibly in the near future – university towns and downsized defense establishments across U.S. states such as VA, GA and others! Innovation. Innovation is a key enabler of non-linear growth (6% of revenue in fiscal 2007E). Transformational initiatives also encompass process/delivery innovation, e.g., Six Sigma, Lean Principles and the Factory Model. Cultural diversity. Almost 40% of the 3,500 onsite employees in Europe are locals. Additionally, Wipro has initiated campus hiring in the U.S. and Europe. Human Resources. Wipro proactively attended to ongoing concerns over a labor shortage, escalating costs and affordability. Average offshore salary increases are likely to remain in the range of 12-13% YoY while onsite pressures could intensify. Most important, 46% of the workforce falls into the “under three years of experience” or low-cost category vs. a target exceeding 55%. In 2007, India is expected to graduate 425K engineers (vs. 75K in the U.S.) with 12-16% annual growth. At present, the company database houses 200K active profiles with 8K new additions per month. Manpower quality is being addressed with stepped-up investment in training (capacity = 5K per day across six locations). Supply constraints should also be mitigated by collaborative programs that target non-engineering majors. Management repeated that annual visa caps could become an impediment to longer term growth. BPO. The Indian BPO industry is forecast to grow at a 39% compound clip in fiscal 2006-10, from $6.7 billion to $25.0 billion. Reengineering capabilities and process efficiency are becoming critical differentiators. Wipro identified major market trends: focus on end-to-end transformational competence, which could account for 60% of the market in 2010E; adoption of outcome-based pricing; and above-average growth across the Financial Services, Telecom and Finance & Accounting segments. Wipro has restructured its sales approach toward integrated solutions; discontinued processes like outbound telemarketing (9% of revenue in June 2005); introduced outcome-based pricing (24% of revenue); globalized its workforce (Romania center); and negotiated higher prices with clients. The operating margin ranks among the best in the industry. Recent wins include the entire Finance & Accounting back-office function at a Fortune-100 manufacturing company. Consulting. Wipro intends to leverage the Consulting unit to elevate its level of engagement, penetrate large accounts and attract talent. This practice has played a key role in winning six deals valued at $50+ million each. Projects address business/IT process transformation, transition management and performance improvement. Including offshore specialists, the segment has 1,700 consultants and revenue of $220 million in fiscal 2007E. Financial. Wipro singled out campus recruitment and a shifting employee-mix as offering 400-500 bps of margin headroom. Average price realizations are expected to improve 1-2% YoY. The tax-rate is expected to peak about three percentage points above the current level.
All told, we cannot argue with management’s observation: “It’s pretty sexy to be a nerd in India these days!”