EDELSTAR • FUNDAMENTAL RESEARCH
February 02, 2015
Wipro Ltd
Current Price: Rs. 606 Target Price: Rs. 675
Buy
BUSINESS OVERVIEW
Wipro Ltd (WIPLTD) is a leading Indian company with business interests in export of IT & BPO services, domestic hardware, consumer lighting, and consumer care. It has the widest range of services, including systems integration, IT-enabled services, package implementation, software application development & maintenance, and R&D services. Wipro is the first P CMM Level 5 and SEI CMM Level 5-certified IT services company in the world. It has 1,018 clients spanning the BFSI, manufacturing, retail, utilities, and telecom verticals. Wipro has 154,297 employees. The company’s revenues for the past twelve months stood at INR457bn (USD6.9bn).
INVESTMENT THEME
· IT outsourcing demand from US picking up: IT Industry revenues are forecasted to grow by 13-15% over FY14-15. The domestic IT sector derives over 60% revenue from US. Going forward, business recovery will be led by the US. Macro fundamentals seem to be improving in the US after QE2 by Fed, with recent data showing encouraging trends. US GDP has recovered sharply in the near term, growing at 4.6% YoY in Q2CY14. Un-employment rate in US is also showing signs of recovery with jobless claims down at fourteen-year lows and improving housing starts data showing revival in housing economy. Wipro as a scale player is expected to benefit from the same.
· Revenue growth to improve: Wipro post its restructuring exercise, realigned its client facing profiles and also increased its focus on mining strategic clients. It is also investing in sales and marketing to increase its new deal wins rate, its S&M spend has gone up to 7.0% vs 5.9% in FY11. Wipro is now effectively competing in higher number of deals than earlier and is hitting the final shortlist of vendors. We believe continued investments in S&M and increased focused on client mining would result in higher new deals wins and revenue growth going forward.
· Operating Metrics to improve from heron: Wipro’s EBITDA margin has been in the range of 20-21% in FY13 vs the earlier range of 22-23% in both FY10 and FY11. Going forward, we believe EBITDA margins are set to rise largely due to improvement in utilisation due to new deal wins. We expect utilisation to improve from current 79% range to 81%-84% range.
· Attractive Valuations: We expect revenue growth to improve to 2-4% on a QoQ basis in FY15 versus the 0-2% in FY14, driven by improved client mining and deal flows. We expect the improved revenue momentum to drive earnings upgrades and re-rate the stock from current levels, though at a more gradual pace than Infosys. Wipro now trades at ~13x on FY17E and at ~20% discount to its peers. There is pessimism on the company – with some signs of 2H recovery, recent INR depreciation and current valuations, risk reward is favorable. We expect Wipro valuation discount to peers to narrow on the back of potential trigger of large deal being won in coming two quarters.
INVESTMENT RISKS
· Sustained slowdown in the US;
· Failure in maintaining margins at current levels, while pursuing large deals;
· Appreciation of the INR against the USD, EUR and GBP.
OUTLOOK AND VALUATIONS
WIPRO strategy of grabbing bigger share of large deal has been witnessed, ramp-up of which helped it offset the weakness in the core software over the past three quarters. Going forward, with improvement in the overall IT spending, we believe new business will gather traction for WIPRO, which will reflect in revenue growth. On our FY16E and FY17E EPS estimate of INR 40 and INR 44 the stock is currently trading at a P/E of 15x on FY15E basis and at a P/E of 13x on FY17E basis. Given these attractive valuations and its growth prospects, we believe the stock offers upside potential in the near term.
QUICK DATA
Face Value (Rs.)
2.0
Div. Yield (%)
1.3
No of shares ('mn)
2468.7
52-week High/Low (Rs)
622 / 475
NSE Symbol
WIPRO
BSE Code
507685
Edel Code
WIPLTD
Market cap (Rs. bn.)
1487
SHAREHOLDING PATTERN (%)
Promoters
73.5
MFs, FIs & Banks
3.5
FIIs
10.1
Others
12.9
EDELWEISS CLASSIFICATION
Market Cap
Large Cap
Relative Risk
Low
Relative Reco
Sector Performer
Sector Rating
I.T - Overweight
GROWTH METRICS (%)
Year to June
FY14
FY15E
FY16E
Revenues
16.0
7.1
11.6
EBITDA
24.0
7.3
11.4
Net Profit
27.1
7.7
15.5
EPS
26.9
7.7
15.5
EDELWEISS RATIOS - COMPARATIVE VALUATIONS
Company
Wipro
HCL Tech
Infosys
TCS
1 Wk Price performance (%)
3.26
(1.63)
(0.92)
0.93
3 M Price performance (%)
9.49
10.55
13.08
2.28
PE (x)
17.30
16.90
20.10
23.60
EV to EBITDA (x)
12.46
12.59
13.75
18.05
Return on Capital Employed (%)
29.49
43.86
35.63
60.13
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FINANCIAL SNAPSHOT
Year to March
FY14
FY15E
FY16E
FY17E
Net Revenue
43,426
46,663
53,706
60,097
Gross profit
13,878
14,714
17,126
18,974
EBITDA
9,710
10,315
11,970
13,145
EBIT
8,599
9,075
10,681
11,762
Profit After Tax
7,840
8,576
9,824
10,864
Diluted EPS (INR)
32.0
35.0
40.0
44.0
EPS (INR) diluted
32.0
35.0
40.0
44.0
Diluted PE (x)
19.1
17.5
15.2
13.7
EV/EBITDA (x)
14.1
13.0
10.9
9.6
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TECHNICAL VIEW
Resistance
Resistance1 - 632
Resistance2 - 666
Support
Support1 - 572
Support2 - 550
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