Networth Stock Broking has come out with its earning estimates on the technology sector for the quarter ended June' 07. According to the report Wipro is expected to post net profit of Rs 710 crore (Rs 7.1 billion) in the first quarter versus Rs 860 crore (Rs 8.6 billion) in the previous quarter.

During the same quarters its net sales are seen up at Rs 4,220 crore (Rs 42.20 billion) as against Rs 4,330 crore (Rs 43.30 billion).

Highlights for the quarter

Muted growth for Q1FY08

We expect a negative sales growth of 2.6% qoq. This is largely attributed to the Rupee appreciation. Given Wipro’s high concentration on dollar billing (78% of total revenues that is highest amongst its peers), we see Wipro as the hardest hit by currency fluctuation.

Stable pricing

The billing rates for Wipro looks stretched as of now. We may not see an appreciation of more than 1 per cent a year which restricts its pricing power and consequently any margin appreciation.

Success at client miming remains a challenge

Wipro’s active clients have increased very marginally from 612 in Q2FY07 to 620 in Q4FY07. This is not a healthy indication of business growth.

BPO utilization is a concern

The BPO utilization has fallen very sharply from 70% in Q2 FY07 to 63% in Q4FY07. We expect this situation to be rectified in this quarter.

Relatively Lesser pressure on EBITDA margins in Q1FY08

Wipro’s EBITDA for Q1FY08 will look less suppressed because of its policy of salary increase starting from 2nd Quarter.

Recent Acquisition of UNZA

Wipro has acquired a Singapore based consumer care company UNZA that will be effective from Q2FY08. Hence there is no effect on the financials in this quarter. UNZA recorded revenues of Rs.6830mn in FY07 with EBITDA margins of approx. 12%. Going forward, we see a miniscule appreciation of Re 0.4-0.5 on Wipro’s FY09 EPS.

Valuations

At the current market price, the stock trades at 20.5x its FY09 EPS of Rs.25.6. Wipro is currently trading at par with Infosys which is not entirely justified. We value Wipro at 23x its FY09 EPS of Rs.25.6. We would recommend our investors to hold the stock with a 12 month price target of Rs 590.