Wipro Lives to Fight Another Day

Excerpts from Gilford Securities analyst Ashish R. Thadhani's recent update to clients on Wipro Ltd. (NYSE: WIT):

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Investment Conclusion. Based on a short-term revenue slowdown and lower underlying profitability, we are reducing our estimates: fiscal 2009 EPADS to $0.60 on revenue of $6.177 billion (25% YoY growth) from $0.63 on revenue of $6.524 billion; and fiscal 2010 EPADS to $0.70 on revenue of $7.686 billion (24% YoY growth) from $0.77 on revenue of $8.409 billion. Our estimates imply 26%/11% compound revenue/EPADS growth in calendar 2007-09 – after factoring a one- time jump in the tax-rate due to expiration of prior tax benefits.

Given continued investor concern over the U.S. IT spending environment (61.4% of revenue), we are resetting our target price from $16.50 to $14. In 12-months, this would correspond to 20x forward EPS of $0.70 – in line with the current valuation (21x). While recent deterioration in the macro environment poses short-term challenges, this scenario could serve to accelerate longer-term offshoring adoption. Wipro remains differentiated by its leading presence across fast growing practices such as Infrastructure Management and BPO; penetration of the Technology vertical; significant margin levers; an acquisition program emphasizing domain/geographic expansion; focus on process excellence; and exposure to Indian consumer/infrastructure spending.

4Q08 Results. EPADS of $0.15 vs. $0.14 a year ago on revenue of $1.399 billion (39% YoY growth) beat our $0.14 estimate on revenue of $1.411 billion. Results benefited from a $19 million forex gain (+1.2 cent EPS impact) and $6 million R&D credit (+0.4 cent). Accordingly, operating income rose 29% YoY and exceeded our estimate. Highlights included 5.5% QoQ organic revenue growth in the Global IT Services segment (based on realized and not quarter-end exchange rates); improved operating margin at the recently acquired Infocrossing unit; and three $50+ million wins, including a U.S. consumer electronics company and Etihad Atheeb Telecom in Saudi Arabia.

Wipro will hold its annual Analyst Day on May 21 in New York.