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Wipro Ltd (Q3 FY14)

India Infoline Research Team / 14:23 , Jan 20, 2014

CMP Rs552, Target Rs650, Upside 17.8%

  • Revenue growth/Q4 FY14 guidance marginally behind expectations; but growth convergence with industry continues 

  • Growth disparate within verticals/services; sustained progress on client mining

  • Material OPM expansion was heartening; longer-term outlook is positive

  • Earnings upgraded on better margin performance; 9-12 month TP raised to Rs650

Result table
(Rs mn)
Q3 FY14
Q2 FY14
% qoq
Q3 FY13
% yoy
Net sales
113,317
109,920
3.1
95,887
18.2
Operating profit
26,527
25,038
5.9
20,501
29.4
OPM (%)
23.4
22.8
63 bps
21.4
203 bps
Depreciation
(3,109)
(2,616)
18.8
(2,472)
25.8
Interest
(898)
(656)
-
(472)
-
Other Income
3,812
3,412
11.7
2,896
31.6
PBT
26,332
25,178
4.6
20,453
28.7
Tax
(6,060)
(5,754)
5.3
(4,472)
35.5
Effective tax rate (%)
23.0
22.9
-
21.9
-
Minority Interest
(125)
(103)
-
(90)
-
Adjusted PAT
20,147
19,321
4.3
15,891
26.8
Adj. PAT margin (%)
17.8
17.6
20 bps
16.6
121 bps
Profit from Discontd Op 
-
-
-
1,273
-
Reported PAT
20,147
19,321
4.3
17,164
17.4
EPS (Rs)
8.2
7.9
4.3
7.0
17.4
Source: Company, India Infoline Research

Revenue growth/Q4 FY14 guidance marginally behind expectations; but growth convergence with industry continues 

Wipro reported slightly slower than expected constant currency (CC) dollar revenue growth in its IT services segment at 2.3% qoq (our estimate was 2.6% qoq). Aided by 60bps cross currency tailwinds, the reported growth stood at 2.9% qoq. IT services revenues at US$1,678mn were within company’s guidance of US$1,660-1,690mn. The revenue growth performance was better than Infosys and closer to TCS thus implying increased convergence with growth rates of larger peers. With pricing being stable, the dollar revenue growth was largely volume driven. The onsite/offshore revenue mix was steady at 54:46 while contribution of revenues from fixed priced projects increased by 240bps qoq to 50.6%.


Similar-to-peers revenue growth is likely to continue in Q4 FY14 with the company guiding for dollar revenues of US$1,712-1,745 implying 2-4% qoq growth. However, on an organic basis (post excluding revenue addition from Opus CMC acquisition) the revenue growth guidance stands near 1.4-3.4%, which was marginally below our expectation of 1.8-3.6% qoq. IT products segment revenues grew by negligible 2% yoy in rupee terms. 


Growth disparate within verticals/services; sustained progress on client mining

During Q3 FY14, Wipro witnessed strong revenue growth in Retail & Transportation (4.9% qoq) and Healthcare & Life Sciences (8% qoq) verticals. Amongst services, Technology Infrastructure Services (5.9% qoq), BPO (4.1% qoq) and Products Engineering (2.9% qoq) were the key drivers. ADM growth continued to be significantly weaker than industry at 0.9% qoq. Revenues from Europe grew by robust 5.4% qoq while US revenues grew ahead of the company at 3.1% qoq. Progress on mining within Top clients continues to impress; the Top 10 clients grew at much higher rate than the company (being third consecutive quarter). Growth within Top 2-5 customers was substantial at 7% qoq. Wipro also added 1 client each in US$100mn+, US$50-75mn and US$20-50mn buckets. 


Material OPM expansion was heartening; longer-term outlook is positive

Wipro’s IT services operating margin improved by 50bps qoq to 23%, standing at multi-quarter high. As utilization, pricing and onsite/offshore mix were largely stable, the margin improvement was largely driven by productivity improvements. This can also be partially explained by the sharp revenue mix shift towards fixed priced projects wherein the company has scope for extracting efficiency gains. Outlook for margin remains encouraging with ample headroom for utilization improvement (currently at modest 73%) and company’s intense focus on productivity improvement. IT services employee count declined by 814 and utilization increased to 16.3%. IT products segment made an operating loss after recognizing a non-recurring expense of Rs209mn with respect to termination of manufacturing of Wipro branded desktops, laptops and servers. We estimate Wipro’s operating margin to improve by 30-50bps in FY15 and FY16.   


Earnings upgraded on better margin performance; 9-12 month TP raised to Rs650

Wipro’s margin performance in Q3 FY14 was commendable and pushes up our assumptions for FY14/15/16 thereby leading to earnings upgrades. This along with improving revenue growth traction (bridging the gap with peers) should drive re-rating of valuation over the medium term. We estimate Wipro to deliver a strong 18-19% earnings CAGR over FY13-16. Retain BUY and with an increased 9-12 month target of Rs650 based on 15x FY16 P/E.  


Financial Summary
Y/e 31 Mar (Rs m)
FY13
FY14E
FY15E
FY16E
Revenues
377,669
437,300
510,398
590,716
yoy growth (%)
17.0
15.8
16.7
15.7
Operating profit
80,454
99,091
117,898
138,228
OPM (%)
21.3
22.7
23.1
23.4
Reported PAT
62,303
76,584
89,752
104,687
yoy growth (%)
16.5
22.9
17.2
16.6
 
 
 
 
 
EPS (Rs)
25.0
31.2
36.6
42.6
P/E (x)
22.2
17.8
15.2
13.0
Price/Book (x)
4.8
3.8
3.0
2.5
EV/EBITDA (x)
15.9
12.3
9.6
7.5
RoE (%)
21.9
23.8
22.1
20.8
RoCE (%)
23.1
25.8
25.2
24.6
Source: Company, India Infoline Research