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Wipro has disappointed on volume growth with a 1.5% sequential growth in volumes in Q3FY2011, which is far below our estimate. However, cross currency tailwinds (1.1%) and pricing uptick (3% quarter on quarter [QoQ]) took IT services’ revenues higher by 5.6% to $1,343.8 million (our estimate was of $1,356.2 million). Consolidated revenues in INR terms grew by 0.6% to Rs7,820.2 crore, The muted growth can be attributed to lower rupee realisation, which was down 2% QoQ and a decline in product revenues by 18% QoQ to Rs879.2 crore. IT services’ earning before interest and tax (EBIT) margins remained stable at 22.2%, which is better than our expectation. The net other income was up by 39% QoQ to Rs132.4 crore on account of higher investment income (up by 23% QoQ to Rs 175.1 crore) and foreign exchange (forex) gains during the quarter as compared to a loss in Q2FY2011. The net profit was up 2.6% QoQ to Rs1318.8 crore, marginally ahead of our expectations of Rs1303.3 crore. For Q4FY2011, Wipro has guided for a 3%-5% sequential growth in revenues in US dollar terms to $1,384-$1,411 million. 

Wipro’s management indicated that IT budgets for CY2011 would be up marginally, however the share of offshoring would increase. The company did experience a delay in signing of deals which led to lower volumes. However, the delay is not indicative of a slowdown. The pipeline for large deals is robust with more deals seen in the infrastructure technology outsourcing (ITO) and BPO categories, which are end-to-end transformational type of deals. The discretionary IT spent is increasing with clients wanting more value from their businesses. The discretionary IT spent is expected to grow ahead of other IT spent. Of the pipeline of large deals, 40% is from the banking and financial services (BFS) space with insurance lagging behind. Within the BFS space, the spent is being witnessed in the core retail banking space, change in platform in the capital markets space and regulatory changes. Traction is seen in the USA and Asia Pacific region. The telecom space is seeing traction in customer service space. In energy & utilities the company is seeing traction in Europe and Ireland in the smart grid. The spent in healthcare is driven by the US healthcare regulatory changes and the company is seeing its pipeline building up in the ITO/BPO type of deals. The only lagging vertical is the technology vertical mainly due to slowness in the USA geography. However, the management is seeing it stabilise. 

We have marginally tweaked our earnings estimates and introduce FY2013 estimate. We maintain our 12 month target price of Rs528, however after the recent sharp run up in the stock price coupled with the absence of earning triggers, we downgrade our rating from Buy to Hold. At the current market price of Rs456, the stock trades at 18x FY2012 and 15x FY2013 estimated earnings. At our target price, the stock will be valued at 17x FY2013E earning.