Wipro Limited (Wipro) Q3’09 numbers were below our expectations owing to the continually weakening operating environment.

On a sequential basis, revenues from the IT business declined 2.4% (in USD terms) due to sluggish volume growth and rising pressure on billing.

The EBITDA margin went down by 53 bps q-o-q to 19.2% because of the provision made for bad debts and the increase in the salaries of the BPO staff during the quarter.

The Company’s volume growth is expected to come under increasing pressure in the next 4–6 quarters, as signaled by the rise in involuntary attrition and the dropping utilization levels.

This is also reflected in the Q4’09 revenue guidance of a 5% q-o-q decline. In our view, Wipro is unlikely to add headcount in FY10, considering the slowdown in ramp-ups, rising cases of project cancellations, and expected budget cuts by the clients, which indicate poor volume growth in the near term.

Valuation

Our DCF valuation suggests a fair value of Rs223, assuming a 13.3% WACC and a 5% terminal growth rate.

At the current market price, the stock trades at its lowest P/E in the last 10 years; however, we believe it reflects the expected deterioration in the company’s operating performance in the near term.

We remain positive on the medium-to-long-term outlook on the stock, considering Wipro’s scale, competencies in various verticals, and the focus on client relationships. Thus, we maintain our HOLD rating on the stock.