Wipro continues to under perform our revenue growth and margin expectations due to portfolio-specific issues that we think are likely to play out in Q119 as well. We believe this warrants a P/E multiple below peers; maintain underweight (UW).
Wipro reported revenue of $2,062 million (MSe $2,072 million). Revenue growth in constant-currency terms was 1.1% q-o-q (MSe 1.8% qoq). Revenue growth trends have been volatile and should remain so – while we saw some acceleration in growth through the quarters in F18, Q4 growth was toward the lower end of the guidance and Q119 guidance implies a drop.
Wipro is seeing strength in BFSI and manufacturing verticals, but communications, healthcare and utilities continue to drag. Wipro guided for revenue of $2,015-2,065 million for F1Q19 (implies -2.3% to +0.1% qoq). This came as a negative surprise, with the company alluding to bankruptcies at two clients with an annual revenue run-rate of over $50 million, weakness in the communications vertical (customer-specific issues in India/Middle East/Africa and change in industry dynamics due to 5G), and further weakness in HealthPlan Services.
Wipro’s commentary on deal trajectory, client mining and strength in digital was positive, which leads it to believe growth could come back in 2Q19. However, management refrained from suggesting if it would match industry growth.
Wipro’s IT Services margins were 16% in Q4 after adjusting for the impact of insolvency of a telecom customer and impairment loss on an acquisition. We see more headwinds coming as Q119 could see a revenue decline that pressures margins, while wage hikes effective June 1 should impact both Q1 and Q2 margins.
With most operational parameters running at high levels (utilization, fixed price contribution, offshore mix), we are unsure of margin levers in F19 other than Rupee depreciation.
The stock has underperformed the Sensex by 10% and large-cap peers by an even greater percentage YTD. Valuation at 14x our F20 EPS estimate is not demanding, but with greater uncertainty on growth and margins, we believe it will remain cheap.
We have lowered our F19 and F20 EPS forecasts by 6.8% each, due to reduced growth and margin estimates.