Wipro Technologies (Wipro)’s Q1FY2010 results (under the US GAAP) were well above our expectations.
The company’s consolidated revenues declined by 3.5% sequentially to Rs6,318.8 crore. In the IT service division, the revenue declined by 2.2% to Rs4,820.5 crore.
In dollar terms, the IT service revenue declined by 1.2% sequentially to $1,033 million but was better than the company’s own guidance ($1,009- 1,025 million) largely due to favourable cross-currency movement.
In constant currency terms, the revenue declined by 2.1% sequentially. The volume on a like-to-like basis (adjusting for the Citi Technology Services [Citos] acquisition) declined by 1.1% sequentially during the quarter. In terms of pricing, the offshore pricing (in constant currency) declined by 2.5% sequentially.
The OPM improved by 70 basis points to 17.3% during the quarter largely due to a sharp improvement in the IT service business.
The OPM of the IT service division improved by 60 basis points to 21.4% during the quarter and was significantly above our expectation.
The improvement in the OPM was on account of a higher proportion of offshore revenue (up 1.6% to 50.4%), a reduction in the sales, general and administrative (SG&A) expenses and a favourable employee mix during the quarter.
The net income grew by 17.7% sequentially to Rs1,067.6 crore, which was significantly higher than our expectation of Rs891 crore.
The results were better than our expectations due to a better than expected operating performance and a sharp rise in the other income. The other income came in at Rs133.5 crore in Q1FY2010 vs a loss of Rs37.9 crore in Q4FY2009.
In terms of guidance for Q2FY2010, the IT service division’s revenues are guided to grow at 0.2-1.9% to $1,035-1,053 million.
We have revised our earnings estimates upward to reflect the better than expected Q1FY2010 performance and the improvement in the OPM.
We have also lowered the effective tax rate for FY2011 for the extension of the Software Technology Parks of India (STPI) benefits. Consequently, we have revised our earnings estimates upward for FY2010 and FY2011 to Rs25.5 and Rs27.8 per share respectively.
Overall, Wipro has reported better than expected results for Q1FY2010. The company has reported an improved performance for the last two quarters. Hence, we have upgraded our earnings estimates.
However, most of the earnings upgrade has already been factored in the current market price (the stock has run up sharply by ~69% in the last three months), leaving limited room for an upside at the current level.
Consequently, we upgrade the stock to HOLD recommendation with a revised price target of Rs476.
At the current market price, the stock is trading at 17.7x FY2010 earnings estimate and 16.2x FY2011 earnings estimate.