Our analysis suggests that Wipro got about 55% of its LTM revenue from approximately 50 key accounts, and like its peers, is heavily dependant on the biggest IT spenders for growth.
Anecdotal evidence suggests that the top accounts across Indian IT companies are also the largest US and European companies, which took to offshoring in a big way in the late 1990s.
Sales growth of the top customers coincided with increased offshoring and vice versa. With both US and Euro zone at the brink of recession and consensus estimates calling for muted growth for our sample customer set, we expect discretionary IT spending cuts by customers.
We are concerned about Wipro’s higher-than-peers’ exposure to the technology sector (29.5% of Q2FY09 revenue, peers at 19-24%) given recent weak results/negative news flow from Dell, Cisco, Nokia and other tech majors.
The company also counts General Motors among its strategic clients. Recent news from GM not only points to weakening auto sales, but also the weak financial position of the company.
Wipro has done well to hold up pricing through H1FY09, but we expect that this could be temporary as deal flows dry up.
The company also has forex losses related to currency hedging of Rs13.8 billion (around $280 million) in the balance sheet which we expect will move into the P&L over the next several quarters and could continue to pressure EPS.
We cut our FY10E US dollar based IT services revenue growth by 14.6%. Our new FY10E US dollar based IT services revenue estimate calls for a y-o-y growth of 3.4% (y-o-y growth of 9.9% in Indian rupee terms). This translates into a y-y EPS growth of 5.2% in Indian rupee terms. Our three-year FY08-11E rupee based EPS CAGR now stands at 8.4%.
Our DCF based TP of INR200 (WACC of 14.0%, terminal growth of 5%) is based on a 10-year revenue CAGR of 12.1% and an annual margin drop of 63bps. Our TP implies an FY10E P/E of 7.2x, a 28% discount to Infosys.
We are downgrading Wipro to REDUCE from Hold.