Wipro - 2QFY14 Result Update - Centrum

Revenue traction returns, likely to sustain
We revise our estimates for Wipro revenues marginally and margins upwards,
maintain Buy rating and set a new Sep’14 TP of Rs 600 (up from Rs567). Though
Wipro’s 2QFY14 revenues were somewhat below our expectations with IT Svcs up
3.2%/2.7% QoQ in constant currency/USD terms (vs. our estimate of 3.7%), with
broad-based growth across verticals, strong revenue additions in the US, we think
Wipro’s legacy issues are largely behind it. The strong improvement in IT Svcs EBIT
margin (up 252 bps QoQ, 33bps higher than our estimate) despite June salary hikes
is encouraging. With account management improvements in place and a new focus
on hunting and on BFSI, we expect the rebound in revenue momentum to persist.

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 Revenue momentum at last: While two quarters of good guidance might be too early to
call a trend, management’s confidence in the pipeline and growth over FY15 instils
enough confidence, as do their plans to start ramping up hunting teams. We expect S&M
investments to sustain but revenue growth to pick up with large deals (BPaaS was
mentioned as a focus for BPO hinting at such large multi-tower deals). Growth was
broad-based with surprisingly strong additions in Global Media & Telecom (USD 11mn to
USD 227mn), Healthcare and Life-sciences (USD 9mn to USD 165mn) and even financial
services (adding USD10mn to USD 431mn, the strongest showing since 2QFY13).
 Margin expansion beyond our expectations: Helped partly by rupee depreciation of
9.7% QoQ and an increase in blended utilization (up 140bps to 66.1%), IT Svcs EBIT
margin improved 252bps QoQ (to 22.5%) despite wage hikes effects for the full quarter
from the June salary hikes. IT Svcs G&A leverage improved further (down 61bps QoQ to
5.3% of sales) while S&M investments continued at 7.1% of sales. We expect S&M to
remain at this level (higher than the 5.2-5.9% through FY09-12and the 6.6% in FY13)
while G&A control will contain G&A at present levels except for spikes for visas in Q4.
 Legacy portfolio issues behind it, revitalizing hunting teams: With the telecom
equipment manufacturers (Nortel, Alcatel-Lucent) share coming down and with a
focused strategy of increasing footprint in verticals where spending is more resilient
(Energy & Utilities, BFSI), Wipro has changed its client portfolio to a remarkable degree. Its
plan to increase focus in BFSI (insurance in particular) and the revelation that almost all
the major European banks they wanted as clients are now on-board, were refreshing.
With a new sales head for BFSI in Shaji Farooq, we expect the North American BFSI
hunting wins to contribute significantly over FY15/FY16.
 Increasing revenue and margin estimates; maintain Buy: Wipro is currently trading at
13.9x Oct’13-Sep’14 EPS. We modify our revenue estimates marginally, revise our EBITDA
margin estimates upwards, maintain Buy rating and set a revised Sep’14 target price of
Rs600 (14x 1-Year Fwd EPS). Our target price does not factor in a re-rating (which we
think is possible sustain given the margin uptick this quarter and the encouraging
guidance for the next quarter).