Remain ‘neutral’ on Wipro, target Rs 570

By: | Published: April 23, 2016 6:09 AM

Wipro (Wipro) missed expectations on revenue/margins in Q4 and disappointed on 1QFY17F CC revenue growth guidance of 1-3% q-o-q (vs consensus of 2.4-4.4%), which implies -1% to +1% organic growth (ex HPS acquisition contribution).

Wipro (Wipro) missed expectations on revenue/margins in Q4 and disappointed on 1QFY17F CC revenue growth guidance of 1-3% q-o-q (vs consensus of 2.4-4.4%), which implies -1% to +1% organic growth (ex HPS acquisition contribution).

The results reinforce our caution on growth/margins at Wipro in light of: its weaker positioning in developed markets (US/Europe), the well-entrenched competition in key growth segments (BFSI, IMS and BPO), limited progress of client mining initiatives; and a likely margin drag as Wipro competes to close growth gaps with peers. Given Wipro’s lower USD revenue/EPS CAGRs of 10% (7% organic)/ 6% over FY16-18F, we believe 15-20% discounts to faster-growing peers Infosys (INFO), Tata Consultancy Services (TCS) and HCL Technologies (HCLT) are justified. We remain Neutral on Wipro, and prefer HCLT/INFO (Buys).

Wipro posted weaker-than-expected 4Q CC revenue growth of 2.7% q-o-q (vs our estimate of 3.5%) and IT services EBIT margins of 20.1% (-10bps q-o-q, vs our estimate of 20.4%), mainly owing to lower-margin acquisitions. Highlights: flattish to down sequential organic growth in large segments (US, Europe, BFSI, energy and applications); IMS, BPO and healthcare were the key growth drivers; IT services EBIT margin of 20.1% was the lowest in four years in 4Q and the outlook for 1QFY17F remains weak.

Our FY17F/18F EPS estimates are 3.5%/2% lower on growth moderation and weaker IT services EBIT margin assumptions of 19% for FY17F/18F. Our TP of R570 remains unchanged, based on 14x FY18F EPS of Rs 40.7.

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