Wipro Ltd (Q1 FY15)

Given Wipro has a strong order pipeline (won a number of significant deals in recent quarters), expectations were high with respect to its Q2 FY15 revenue growth guidance.

Jul 28, 2014 10:07 IST India Infoline News Service

CMP Rs570, Target Rs597, Upside 3.4% 

  • Constant currency growth in IT services lagged expectations 

  • Modest guidance for Q2 FY15; would likely grow materially below industry in FY15 

  • OPM fall was higher; Q2 margin outlook weak, growth resurgence key for long term recovery 

  • Cut earnings by 2-4% for FY15/16; see only marginal upside from current levels 

Result table
(Rs mn) Q1 FY15 Q4 FY14 % qoq Q1 FY14 % yoy
Net sales 111,358 116,535 (4.4) 97,294 14.5
Operating profit 25,507 28,180 (9.5) 20,151 26.6
OPM (%) 22.9 24.2 (128) bps 20.7 219 bps
Depreciation (2,834) (2,880) (1.6) (2,501) 13.3
Interest (888) (842) 5.5 (495) 79.4
Other Income 5,337 4,469 19.4 3,413 56.4
PBT 27,122 28,927 (6.2) 20,568 31.9
Tax (5,942) (6,536) (9.1) (4,251) 39.8
Effective tax rate (%) 21.9 22.6 (3.0) 20.7 6.0
Minority Interest (148) (148) - (84) 76.2
Adjusted PAT 21,032 22,243 (5.4) 16,233 29.6
Adj. PAT margin (%) 18.9 19.1 (20) bps 16.7 220 bps
EPS (Rs) 8.5 9.0 (5.4) 6.6 29.6
Source: Company, India Infoline Research

Constant currency growth in IT services lagged expectations 

Wipro reported slower than expected constant currency (CC) dollar revenue growth in its IT services segment at 0.3% qoq (our estimate was 1% qoq). The sequential growth was also towards the lower end of its modest growth guidance of (0.3)-2%. More striking was revenue weakness in key markets of US (0.6% qoq) and Europe (-1.5% qoq) and not in IMEA (3.4% qoq) business as was built in the quarterly revenue guidance. As per the management, there were project shut downs within few of the Top 10 accounts (de-grew by ~3% qoq) which impacted revenue traction in developed markets and Retail & Transportation (-3.2% qoq) and Energy & Utilities (-1.2% qoq) verticals. On the contrary, both India and Middle East regions performed much better than expectations.

Amongst services, global infrastructure services grew strongly by 5%+ qoq aided healthy deal wins. The onsite/offshore revenue mix was steady at 54:46 while revenue contribution of fixed priced projects rose further to 52.1% (has increased by 470bps since Q1 FY14). Deal wins momentum remains strong with Wipro wining significant business during Q1 FY15 (similar to Q4 FY14 level). Just recently, company announced a 10-year US$1.1bn outsourcing deal from Canadian utilities firm, ATCO. This is amongst the largest deals in the history of Indian IT industry. 

Modest guidance for Q2 FY15; would likely grow materially below industry in FY15  

Given Wipro has a strong order pipeline (won a number of significant deals in recent quarters), expectations were high with respect to its Q2 FY15 revenue growth guidance. However, company guided for an unexciting 1.7-4% qoq growth (similar guidance was given for Q2 FY14 also). Even if Wipro delivers in the middle of the range (has usually been the case), its growth would still be lower than most of its peers in a traditionally strong quarter for the industry. While near-term status-quo on project shutdowns at few top clients will have an impact on Q2 FY15 revenues, subsequent resolution should push growth in H2 FY15. Still, in our view, Wipro will materially underperform industry growth in FY15 (estimate company to deliver 10-11% growth in IT services). Growth convergence with peers will be more prominent in FY16 (estimate an improved 15% growth) as execution on deals picks momentum. 

OPM fall was higher; Q2 margin outlook weak but growth resurgence key for long term recovery  

Wipro’s IT services operating margin declined by higher-than-expected 170bps qoq to 22.8% on account of rupee appreciation, wage hikes from June 1st and distribution of restricted stock units (RSUs). The decline could have been higher if not for improvement in employee utilization (110bps qoq including trainees) and sustained productivity gains (likely on fixed priced projects the share of which has been increasing rapidly). Despite an expected pick-up in growth, company added only 1% to its IT services headcount thus suggesting its intent to push utilization levels further (in our view there is incremental headspace of 200-300 bps). TTM voluntary attrition inched-up further to 16.1% (at multi-quarter high) mainly representing very high attrition in less experienced (2-5 years) employee band. In Q2 FY15, margin is expected to decline further (our estimate is of 80bps qoq fall) on account of full-quarter impact of the merit salary increases implemented onsite and offshore. Over the longer term, margin would be determined by growth as the company still has headroom for utilization and productivity improvement. We estimate Wipro’s operating margin to be in a narrow band of 22.5-23% for FY15/16.


Cut earnings by 2-4% for FY15/16; see only marginal upside from current levels 

In response to weaker-than-expected operational start to the year, we have reduced our FY15/16 earnings estimates by 2-4% (second succeeding quarter of cut). Muted Q1 FY15 performance would defer street’s expectation with regards to Wipro’s revenue growth convergence with industry thereby halting incremental valuation re-rating of the stock at least in the near-term. On lowered FY16 earnings, Wipro trades at nearly 15.5x P/E which is ~10% premium to HCL Tech and Tech Mahindra whose performance has been more consistent and they also have better near-term revenue momentum. Rate the stock as Accumulate with 9-12 month target price of Rs597.


Financial Summary
Y/e 31 Mar (Rs m) FY13E FY14 FY15E FY16E
Revenues 377,669 437,066 469,685 527,468
yoy growth (%) 17.0 15.7 7.5 12.3
Operating profit 80,454 99,896 107,408 119,018
OPM (%) 21.3 22.9 22.9 22.6
Reported PAT 62,303 77,382 83,383 91,965
yoy growth (%) 16.5 24.2 7.8 10.3
         
EPS (Rs) 25.0 31.4 33.8 37.3
P/E (x) 23.1 18.4 17.1 15.5
Price/Book (x) 5.0 3.9 3.2 2.7
EV/EBITDA (x) 16.5 12.7 11.0 9.3
RoE (%) 21.9 24.0 20.7 18.7
RoCE (%) 23.1 26.1 23.5 21.9
Source: Company, India Infoline Research

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