With revenue growth of 2% q-o-q CC, WPRO met its guidance for Q1FY17. However, the 0-1% q-o-q CC guidance for 2Q ruled out potential of bridging growth gap to peers in the foreseeable future. Continued drag in the Energy vertical, sluggishness in top accounts and restructuring in the India and Middle East business may continue to weigh on overall revenue growth.
IT Services EBIT margin of 17.8% declined by 190 bp q-o-q (marginally below our estimate of 18.1%).
Overall EBIT margin was at 16.1%, below our estimate of 16.7%, led by the fourth consecutive quarter of losses in the product business. PAT was `20.5 billion, -8.2% q-o-q, against our estimate of `20.7 billion.
Wipro has been making investments in building capabilities, people and in strategic accounts, leading to headwinds that are more pronounced than earlier anticipated. While it intends to make up for the lost margins through automation and productivity gains, but only over the medium-term.
Rate dilutions and consequent margin pressure are expected to weigh upon margins in the near-term, in addition to the full impact of wage hikes in 2Q. Even the margins will be soft till growth contributes, especially given the elevation of investments. We now expect USD revenue CAGR of 7.3% over FY16-18 and earnings CAGR of 6.0%.
Our target price of Rs 570 discounts FY18E earnings by 14x.