Margins at Wipro Under Pressure

Wipro, Ltd. (WIT) 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.

Reasonable Value for Polycom

We maintain our Hold recommendation and the same valuation
target for Polycom, Inc. (PLCM), a leading provider of voice/video conferencing solutions, ahead of its second quarter 2008 financial results. Robust market demand for online voice/video collaborative solutions and strong business relationships with several large companies are considered enablers for the company's long-term prospects.

Polycom's high-definition, mid-range products have generated impressive growth in an increasingly interactive world. Demand is expected to remain firm in future reporting periods as the use of collaborative conferencing technology is highly correlated with restrictive travel budgets at business enterprises. This pattern is exhibited, most often, when the economy is on the verge of an expected recessionary cycle. Beyond macroeconomic demand factors, the company's balance sheet is capable of supporting initiatives for new ventures.

Polycom is trading at 19.3x our fiscal 2008 earnings estimate. This represents a premium to the S&P 500 average but a discount to the peer group average. Furthermore, after adjusting $3.80 of net cash per diluted share, Polycom is trading at more reasonable 16.06x our fiscal 2008 earnings estimates.