Fitch affirms Wipro at 'A-'; Outlook stable

28 Mar 2022 , 06:07 PM

Fitch Ratings has affirmed India-based Wipro Limited‘s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘A-‘. The Outlook is Stable. We have also affirmed Wipro’s senior unsecured rating of ‘A-‘ and the ‘A-‘ rating on the USD750 million senior notes due 2026 issued by Wipro IT Services, LLC and guaranteed by Wipro.

The ratings reflect Wipro’s strong market position in the global IT service industry, improving business performance, robust industry growth, stable profitability and cash generation, and a conservative capital structure. We expect Wipro to maintain its net cash position over the medium term.

Key Rating Drivers

Solid Market Position: Wipro is India’s fourth-largest IT service company by revenue after Tata Consultancy Services Limited (TCS, A/Stable), Infosys Limited and HCL Technologies Limited (A-/Stable). Wipro has a strong globally diversified presence and provides comprehensive IT services to an established customer base.

Revenue Gap Narrows: The revenue gap to HCL, Wipro’s closest peer, narrowed to 8% in the nine months of the financial year to March 2022 (9MFY22), from 22% in 9MFY21. A management reshuffle in 2020 and reorganisation in 2021 led to strong growth. Its 9MFY22 revenue grew by 27% yoy, of which 18%-20% was organic growth, based on our estimates. The growth was stronger than the industry average and that of top peers. We believe Wipro will continue to close the revenue gap with its peers through organic and inorganic growth.

Diversified Customers: Wipro has low customer concentration; its five- and 10-largest clients contributed 12% and 20%, respectively, to FY21 total revenue. Its customers are also spread across industry segments; banking and financial service clients accounted for 31% of FY21 revenue, followed by consumer (16%) and health (14%). It derived 59% of revenue from the Americas, 27% from Europe and 14% from APAC, the Middle East and Africa. We believe Wipro will further diversify its geographical footprint as it aims to expand faster outside the US.

Robust Profitability and Cash Generation: Wipro’s rating is supported by stable profitability and solid operating cash generation. We forecast its EBITDA margin to be around 21% in the medium term, slightly lower than FY21’s 23%, due to intense competition for talent and reversal of pandemic-related savings.

Strong Industry Growth Potential: We expect a robust order pipeline to boost global IT companies’ revenue growth in FY22-FY23. Businesses across various industries and countries are increasingly engaging IT service companies on digital transformation such as customer and employee experience and supply-chain management. IT service spending will rise by 8% in 2022 and 9% in 2023, according to research firm Gartner. We expect Indian IT companies to expand faster than the industry average as they have lower staff costs than global peers.

Fitch expects demand for next-generation technology, such as artificial intelligence, 5G, cybersecurity, digital strategy and cloud services, to grow faster than traditional IT services. These will require greater capability from IT service providers such as strong industry expertise, trained talent and technology stacks. We believe industry-leading IT companies, including TCS, HCL and Wipro, are well-positioned to serve these needs in light of their large operating scales and financial resources available for further investments.

Net Cash Position: Wipro’s rating reflects its robust financial profile, supported by a net cash position of around USD2.1 billion at end-2021. We expect Wipro to maintain its net cash position, with a pre-dividend free cash flow (FCF) margin of 14%-15% in the medium term. We expect Wipro to return 50%-55% of its net income to shareholders via share buybacks and dividends, in line with its shareholder return policy. This should leave room for acquisitions to support growth without impairing its conservative balance sheet.

No Country Ceiling Constraint: The Foreign-Currency IDR is same as the Local-Currency IDR, as we assess the applicable Country Ceiling for Wipro at ‘AAA’. We believe the profit from its overseas subsidiaries in countries with Country Ceilings of ‘AAA’ is sufficient to support a reasonable amount of foreign-currency debt. However, we may reassess the Country Ceiling if foreign-currency debt rises significantly.