Q1 guidance weak though share buyback will restrict downside; ‘Reduce’ retained with revised TP of Rs 270.
Q4FY19 revenue was in line and margin was softer than expected. In keeping with our hypothesis, stretched margin levers had limited scope to sustain. Guidance was softer than expected due to delay in ramp-ups. Nevertheless, buyback of 5.35% equity is a near-term respite.
Growth recovery remains elusive: Wipro’s guidance (in a seasonally weak quarter) indicates another soft start to financial year. Company sees delay in project ramp-ups as the key reason for softer start. We believe the current guidance would restrict revenue growth for FY20/21 to mid-single digit. Capital allocation strategy restricts downside risk in near term. We adjust the share count (share buyback) for FY20/21. Margin is expected to remain in a narrow range despite near-term softness. We have Reduce rating on the stock.
Another year with soft start, share buyback to restrict downside Revenue in line, margin soft: Wipro’s IT Services revenue grew 1.4% (1% in CC terms, AxisCap: 0.6%) QoQ to
$2,075.5 mn, stronger than expectation (AxisCap/Cons: $2,075 mn /2,077 mn); mid-point of guidance ($2,047-2,088 mn). IT margin eroded by ~160 bps QoQ to 18.2% (AxisCap: 19.4%; Cons.: 19.2%) due to INR appreciation despite higher utilisation. Overall revenue declined by 0.4% QoQ to Rs 150.1 bn. EBIT margin eroded by 140 bps to 17% (AxisCap/Cons: 18.2%) due to decline in gross margin by 230 bps (adjustment of HPS amortisation). EPS was at Rs 4.13, a decline of 1% QoQ.
Q1FY20 guidance soft: IT Services revenue guidance of $2,046-2,087 mn implies -1% to +1% QoQ growth in USD terms (AxCap/Cons: 0% to 2% QoQ) excluding the impact of divestment of our Workday and Cornerstone On Demand business which was concluded in the quarter. Weaker-than-expected revenue guidance for Q1 (a seasonally soft quarterfor Wipro) lends limited confidence for FY20-21revenue growth to be beyond mid-single digit.
Estimates and valuations
We have cut USD revenue growth estimate for FY20/21 by ~1% due to weak guidance and slow start to the year. However, we adjust our share count by 5.35% for FY20/21. Hence, our EPS for FY20/21E increases by 5.3%/5.8%. We have Reduce rating on the stock with a revised target price of `270 (15x FY21E) vs. `260 earlier, implying 4% downside from CMP of `281.