Digital’s revenue contribution at ~40% is comparable with industry leaders and the 16% QoQ growth in Q2FY20 more than makes up for revenue decline in the legacy business.
Wipro’s Q2FY20 revenue came largely in line —IT services’ revenue, at $2,049 mn, grew 0.5% quarter-on-quarter (Q-o-Q) [1.1% in constant currency (cc)]. The operating margin increased by 150 bps Q-o-Q to 17.7% versus Street’s estimate of 16.4% on account of higher profitability in IT products business, while IT services margin declined 30 bps Q-o-Q owing to wage hikes.
The management guided for a better Q3FY20 with estimated revenue growth of 0.8-2.8% in USD. Wipro’s 2.5% (Y-o-Y, cc) revenue growth continued to massively underperform peers Infosys and TCS — which reported close to double-digit Y-o-Y growth — a trend which is unlikely to change in the near term. This leads to a continued valuation discount for Wipro at 16x FY21E EPS (vis-à-vis TCS’ 22x and Infosys’ 20x). The unexciting growth metrics justify current valuation of 15.0x FY20E EPS. Maintain ‘hold’ with target price of Rs 264 as we roll over to Q4FY21E EPS.
Most of Wipro’s business verticals clocked a soft quarter, led by a decline in communications (down 2.4% QoQ cc) on a high base. BFSI and health fell 0.1% and 0.6%, respectively.
Europe also continued to post soft numbers (down 1.9% QoQ). Weakness in its most important BFSI vertical and persistently weak performance in health business is a concern. While the Q3FY20 guidance is mildly positive, we expect growth to be considerably below peers TCS and Infosys. We are building 0.8%/1.8% growth for Wipro in USD for FY20/21E versus 9-10% for TCS and Infosys.
Digital’s revenue contribution at ~40% is comparable with industry leaders and the 16% QoQ growth in Q2FY20 more than makes up for revenue decline in the legacy business. Amid strong demand and sustained momentum, Wipro continues to underperform peers on the growth front. Moreover, persistent decline in revenue in Europe and weaker-than-expected performance of the BFSI vertical warrant the lower-than-peers target multiple of 16x FY21E EPS.