How large deals played a key role in Wipro's turnaround

Despite a decent performance in the quarter ended June, Wipro continues to underperform its peers, trading at 14 times the estimated FY13 price/earnings. This is a 20 per cent discount to its five-year historical one-year forward price/earnings average multiple. However, the situation could change soon.

Analysts expect Wipro's revenue to grow 17 per cent this financial year, largely in line with its FY12 performance. Profits are expected to grow 14 per cent, compared to FY12.

In FY14, earnings are projected to grow 17 per cent. Thanks to the company's steps to reduce cost inefficiencies, its earnings before interest, tax, depreciation and amortisation margin is expected to expand 40-50 basis points each in FY13 and FY14.

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Most analysts expect the company's growth to catch up with that of its peers this financial year, as its investments in selling and marketing activities start bearing fruit.

"We expect the divergence in the growth rates of Wipro and its peers to reduce in the second half of FY13. We remain positive on the stock, with a target price of Rs 413 a share," says Sandeep Muthangi, analyst, IIFL.

Wipro has been on a restructuring drive over the past 18 months. The company has aligned its business along six verticals, reorganised roles according to the verticals and improved compensation and incentive structures.

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This has resulted in an improved go-to market strategy for the company, and it has started reaping initial gains in the form of higher mining of large accounts, reduced attrition rates and greater deal participation.

A large part of the rise in $100-million clients has been through higher traction from its top 10 clients. In the quarter ended June, Wipro's revenue rose 24.4 per cent to Rs 10,620 crore (Rs 106.2 billion), while adjusted net profit increased 18.4 per cent to Rs 1,580 crore (Rs 15.8 billion) on an annual basis (sequentially, these rose eight per cent and 6.7 per cent, respectively).

Still, in the past few quarters, the technology giant has lagged its peers in revenue growth, primarily due to a lull in large deal wins.

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The company has been raising its investment in selling and marketing activities, and this would increase growth in the long run. Wipro's selling and marketing expenses (as percentage of revenue) grew 130 basis points since March 2011. It now stands at 6.4 per cent.

Wipro's participation in large deals has improved significantly, and the company has been shortlisted by vendors for more deals than it was before the restructuring.

Yogesh Aggarwal and Vivek Gedda of HSBC Global say, "We believe with continued investments in sales and client partners, deal wins would start improving from the second quarter of FY13, and results, in terms of better growth, should be visible in the second half of FY13. We also expect client mining outside the $100-million client base to start improving in the coming quarters."

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On the flip side, the worsening macroeconomic scenario, characterised by slower deal closures and stiff competition, would be a key challenge for the company.

Wipro plans to focus on the banking, financial services & insurance (BFSI), energy & utilities, retail, life sciences and healthcare segments (which together account for 65 per cent of its revenue) to fuel growth.

While demand in the BFSI segment continues to be sluggish, other verticals are recording growth in technology spending. The buyout of US-based SAIC in 2011 enabled Wipro to enhance its position in the energy and utilities business, which accounts for about 14 per cent of its revenue, against three to seven per cent for its peers.