FY19-21e EPS up 4.6-6.6% owing to margin surprise; TP raised to Rs 355; ‘Reduce’ retained as concerns over growth necessitate caution
Wipro reported solid revenue growth backed by 120 bps q-o-q increase in margin. Client metrics impressed with addition of clients to the $50-mn and $100-mn buckets. Wipro’s print looks encouraging even as we keep a close eye on a couple of challenged verticals and aggressive cost rationalisation. We raise FY19-21e EPS by 5-7% on the back of margin surprise and raise fair value by 9.2% to Rs 355. Cautious view continues as underperformance on growth is likely to persist.
In-line revenue growth; Ebit margin expands further
Wipro reported adjusted sequential c/c revenue growth of 2.4% and 7% on y-o-y comparison, broadly in line with our estimate. Revenue growth was aided by full quarter benefit of the Alight deal that incrementally contributed $25 mn (1.2% to growth) in the December, 2018 quarter. All verticals except technology grew sequentially. From service line standpoint only two of the five practices grew sequentially. Ebit margin of 19.8% increased 120 bps sequentially and was contributed by – (i) 60 bps from currency and hedging gains and (ii) 60 bps from operational measures, of which 30 bps is from the core operations and 30 bps from further rationalisation of cost structure at acquired entities. Net profit of Rs 25.1 bn grew 33% q-o-q and was 5.5% ahead of estimate led by outperformance at the operating level and lower-than-expected ETR.
Encouraging revenue performance raises hope of a turnaround
Nearly all verticals except healthcare and manufacturing have shown signs of growth. Growth from large clients indicates that multi-quarter initiatives to improve account mining are yielding results. Wipro’s positioning in digital competencies has improved over the past few quarters. The company is slowly returning towards normalisation of growth. Against this backdrop, we find 0-2% revenue growth guidance for the March, 2019 quarter disappointing. Wipro is participating in industry demand improvement. However, inconsistent execution combined with relatively weaker profile of clients leaves Wipro more vulnerable. Our revenue growth estimate of 5% for FY20e stays unchanged.
EPS upgrade of 4.6-6.6%; Reduce stays
Sharp improvement in Ebit margin combined with management comments of sustaining it in a narrow band is encouraging. We, however, note that the company has rationalised cost aggressively, which shows barely changed absolute costs in the past two quarters. Nonetheless, we raise FY19-21e EPS estimate by 4.6-6.6% on the back of higher margin assumptions. We raise fair value by 9.2%, valuing the stock at 14X December 2020e earnings. Reduce rating stays.