Wipro Ltd (Q1 FY14)

India Infoline News Service | Mumbai |

Q2 FY14 guidance indicates improving traction; Management commentary turns positive; Maintain BUY

CMP Rs383, Target Rs429, Upside 12.0%

  • IT services revenue marginally ahead of estimates; IT products  impacted by weak IMEA traction
  •  Select verticals/services drive growth; Discretionary spending shows an up-tick 
  • OPM performance in-line with estimates; Employee attrition remains stable
  • Q2 FY14 guidance indicates improving traction; Management commentary turns positive; Maintain BUY
Result table*
(Rs mn) Q1FY14 Q4FY13 %qoq Q1 FY13 % yoy
Net sales 97,346 96,284 1.1 92,676 5.0
Operating profit 20,203 19,965 1.2 19,995 1.0
OPM (%) 20.8 20.7 18 bps 21.6 (82) bps
Depreciation (2,501) (2,314) 8.1 (2,341) 6.8
Interest (495) (395) - (1,292) -
Other income 3,361 3,077 9.2 2,413 39.3
PBT 20,568 20,333 1.2 18,775 9.5
Tax (4,251) (3,973) 7.0 (3,831) 11.0
Effective tax rate (%) 20.7 19.5 - 20.4 -
Other Prov./Minority (84) (86) - (97) -
Adjusted PAT 16,233 16,274 (0.3) 14,847 9.3
Adj. PAT margin (%) 16.7 16.9 (23) bps 16.0 66 bps
Reported PAT 16,233 16,274 (0.3) 14,847 9.3
EPS (Rs) 6.6 6.6 (0.3) 6.0 9.3
Source: Company, India Infoline Research
*Only Wipro IT business (IT services and products)

IT services revenue marginally ahead of estimates; IT products impacted by weak IMEA traction
Q1 FY14 dollar revenue performance (constant currency) for Wipro’s IT services business was marginally ahead expectation.  Against our expectation of 1% cc growth, the services business registered dollar revenues (cc) of US$1604mn – a growth of 1.2% qoq. On a reported basis, the dollar revenues grew by 0.2% qoq to US$1588mn largely impacted by the cross currency movements. Weak capex in India and Middle East geographies led to the strong de-growth (14% yoy rupee terms) in the IT products business. Management indicated improving traction in developed markets especially US with reasonably up-tick in discretionary spending. Improved win-rates have also resulted in higher order bookings for Wipro.

Select verticals/services drive growth; Discretionary spending shows an up-tick   
Growth in Q1 FY14 was led by select vertical/services/geographies. Amongst verticals E&U continued to drive growth (+3.5% qoq) followed by BFSI (+1% qoq). Within services, growth was led by Analytics (+5.8% qoq) and ADM.  Management commented that analytics (which is predominantly discretionary in nature) should continue to show strong traction along with traditional services of ADM, BPO and IMS. Within geographies, growth was led by Europe (+2% qoq) and APAC (+4.4 qoq) On the flip side, IMEA and US geographies were weak de-growing 6.2% and 0.6% qoq respectively. Client mining continued to be strong with Top/Top2-5 clients growing above company average (3%/5.5% qoq respectively). On a positive note, management alluded to client satisfaction index improving 11% yoy.

OPM performance in-line with estimates; Employee attrition remains stable
The OPM for the consolidated business (IT services and Products) came in at 20.8%, largely in-line with our expectation. The headwinds of wage hikes, visa expense, S&M investments and lower utilization were largely offset by the currency benefits resulting in decline of only 30bps qoq in the IT services operating margin. On the pricing front, management commentary was cautious with increased competition seen in certain pockets of the business. On a positive note, though, a large part of the pricing pressure is expected to be managed through efficiency gains in service delivery.  Overall, due to higher other income, the PAT came in 5% higher than expected at Rs16.2bn. On the employee front, attrition remained stable at 13% (compared to 12.5% in Q4 FY13).

Q2 FY14 guidance indicates improving traction; Management commentary turns positive; Maintain BUY
Wipro’s Q1 FY14 results have largely come in-line vis-a-vis estimates with revenues coming in near the top-end of the guidance range. Key highlight of the result was the positive turn in the management commentary indicated by the increased win rates, higher discretionary spending (in pockets), strong pipeline and improving order book (especially in US). This is also validated by relatively robust Q2 FY14 IT services dollar revenue guidance of 2%-3.8% qoq growth. Until Q1 FY14, while operating metrics had showed improvement, volume led revenue traction was largely missing which has now started to show improvement. On the profitability front, decent headroom in key margin levers (like utilization) should continue to help company maintain (if not improve) its operating margin. We continue to remain positive on Wipro both considering the improving performance and relatively cheaper valuation. Maintain BUY with increased 9-month TP of Rs429.
 
Financial Summary*
Y/e 31 Mar (Rs m) FY12 FY13 FY14E FY15E
Revenues 322,749 377,669 420,104 465,405
yoy growth (%) 3.9 17.0 11.2 10.8
Operating profit 69,819 80,454 85,946 98,747
OPM (%) 21.6 21.3 20.5 21.2
Reported PAT 53,465 62,303 65,751 75,521
yoy growth (%) (0.3) 16.5 5.5 14.9





EPS (Rs) 21.7 25.3 26.7 30.6
P/E (x) 17.6 15.1 14.4 12.5
Price/Book (x) 3.3 3.3 2.8 2.4
EV/EBITDA (x) 12.6 10.6 9.5 7.7
RoE (%) 20.4 21.9 21.3 20.6
RoCE (%) 21.3 23.1 22.7 22.5
Source: Company, India Infoline Research
*Our new estimates now include only the Wipro IT business (IT services and products).

BSE 286.00 [1.20] ([0.42]%)
NSE 287.20 [0.60] ([0.21]%)

***Note: This is a NSE Chart

 

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