Wipro stock: HSBC has this to say after IT major underperforms peers

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Published: November 22, 2017 3:08:32 AM

Wipro has outperformed peers within the BFSI vertical with double-digit revenue growth (14% y-o-y in 2Q18) and strong deal wins. The recovery in IT spending by some of its banking clients (for which Wipro has a larger presence) has helped growth acceleration.

Management reiterated the company’s target to achieve industry average growth by 4Q18 and to further maintain its growth momentum in FY19. (Reuters)

We hosted Wipro on November 7 at the HSBC Asia Investor Conference in New York. Management reiterated the company’s target to achieve industry average growth by 4Q18 and to further maintain its growth momentum in FY19. Receding company-specific headwinds, improving client mining and strengthening delivery capabilities are helping with the turnaround. Wipro has outperformed peers within the BFSI vertical with double-digit revenue growth (14% y-o-y in 2Q18) and strong deal wins. The recovery in IT spending by some of its banking clients (for which Wipro has a larger presence) has helped growth acceleration. We believe that Wipro has gained market share with banking clients, particularly in Europe, and won large deals in recent quarters. The company expects sustained growth in this business in the coming quarters.

Management reiterated its focus on building upstream consulting services, which now account for 6% of revenues. Wipro has spent $1 billion in M&A in recent years on companies such as Appirio and DesignIt to build its upstream consulting and digital capabilities, which is helping to position Wipro in the “leaders quadrant” for many digital capabilities. Unlike in earlier technology cycles, Wipro believes that the Indian IT industry is much more agile and closer to global major peers like Accenture in the digital transformation lifecycle. Digital already contributes nearly a quarter to Wipro’s revenues and is growing at 30% y-o-y in 1H18. Given the diverse, project-based DNA of digital applications, tuck-in acquisitions are essential to ramp up capabilities, in our view.

Wipro believes that revenue growth headwinds in the healthcare and telecom verticals should bottom out in 3Q18 and that consequently its 4Q growth should be in line with the industry growth. We also believe Wipro’s organic growth should improve in the coming quarters.

However, Wipro has underperformed peer group growth for the past eight years, and its past 12 months revenues have been flat while peers have grown 6-7% (organic cc). This recovery appears to already be factored into the stock price as Wipro trades at 17x FY19e earnings, driving our Reduce rating. Wipro has outperformed peers within the BFSI vertical with double-digit revenue growth and strong deal wins. BFSI contributes nearly a third of revenues for Wipro with relatively higher exposure to Europe. The recovery in IT spending by some of its banking clients has helped the growth acceleration. The higher contribution from Europe also led to higher cross-currency tailwinds in the recent quarters.

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