Margins at Wipro Under Pressure

Wipro, Ltd. (WIT - Analyst Report) reported upside in revenues and earnings in 4Q08 which was well supported by large deal wins, geographic expansion, alliances and partnerships. We remain concerned that margins may continue to be pressured by strength of the rupee in the near-term.

However, the company has been able to maintain operating margins despite salary hikes to onsite employees. It has also provided improved revenue guidance for 1Q09 and integration of its acquisitions seems to be well on track. We are revising our adjusted estimates to reflect 25% revenue growth rate for 2009 in rupee terms and 24% in dollar terms. We continue to rate WIT a Hold.

The company is encountering weaknesses in the U.S. economy in general and financial services sector in particular. It is focusing on driving growth through mega and gamma accounts, by increasing investments in Middle East, Germany and Canada as well as by forging partnerships with large technology providers.

Wipro is currently trading at 19.6x our fiscal 2009 earnings estimate, which is below its historical range of 35x to 40x and median of 37.1x its forward EPADR estimates. Also, WIT is trading at a higher P/E than most of its peers, which makes the company more risky on a relative valuation. We believe that the shares could trade between 20.4x 20.6x our 2009 earnings estimate of $0.59 per ADR, or $12.10 per share, given the positive revenue outlook for FY09.

Udayan Mukherjee contributed to the report.

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