In 3QFY2009, Wipro recorded a disappointing 1% q-o-q growth in topline. The key IT Services Business clocked a decent 6.9% q-o-q growth in revenues, which was primarily driven by Rupee depreciation.

The realized Rupee rate rose by 7.9% q-o-q to Rs46.17 (Rs42.80 in 2QFY2009). Volume growth was sluggish, with onsite volumes growing by just 1.4% q-o-q while offshore volumes grew 2.7% q-o-q.

However, pricing during the quarter fell, with onsite rates falling by 3.9% q-o-q and offshore rates by 1.6% q-o-q.

This was primarily on account of the cross-currency headwinds seen during the quarter, with currencies like the British Pound and Euro depreciating significantly against the US Dollar, leading to their value in US Dollar terms eroding.

During 3QFY2009, the company recorded a 53bp q-o-q contraction in EBITDA margins mainly due to the salary hikes given to its BPO employees.

It also made a provision for receivables from Nortel, which recently filed for bankruptcy. This had an impact of 60bp on Margins. Excluding this, Margins rose by 10bp q-o-q.

Wipro, in spite of the margin contraction, recorded a 2.6% q-o-q rise in bottomline in 3QFY2009, which was achieved mainly on account of higher other income (up 60.7% q-o-q). On a y-o-y basis, bottomline grew 17.6%.

Outlook

Over FY2008-10E, we expect Wipro to record 20.8% and 12% CAGRs in topline and bottomline, respectively.

At the CMP, the stock is trading at 7.8x FY2010E EPS. Although valuations seem reasonable with relatively low downside risk, the business outlook remains challenging, as reflected by the company’s disappointing 4QFY2009 guidance.

We believe the outlook will not improve significantly in the near-term. Looking forward to FY2010, this fiscal could witness even more difficult times for Indian IT vendors.

While Infosys continues to be our preferred pick in the IT Sector, on account of the recent under-performance of the Wipro stock, we maintain a BUY with a target price of Rs281, implying a P/E of 10x FY2010E EPS (13x earlier). However, stock price upsides in the near term could remain capped.