28 April 2014

Wipro Ltd - Q4FY14 Result Update - Revenue misses estimate, but positive leading indicators: Centrum

Rating: Buy; Target Price: Rs670; CMP: Rs572; Upside: 17%



Revenue misses estimate, but positive leading indicators



While Wipro’s revenue was slightly below our expectations, we were
heartened by several positive leading indicators such as continued
strong traction in Europe and strong new client revenue growth even
excluding Opus CMC.  Europe contributed another strong quarter while
revenue additions continued across all verticals except Manufacturing
& Hi-Tech. Margins improved as expected as utilization improved and
headcount net employee addition remained slightly negative. We retain
our Buy rating with a 1-Year TP of Rs670.

$ Organic growth below expectations but Europe momentum a positive:
While revenue growth was below our expectations, we are heartened
bycontinued strong growth in both Europe (adding USD19.3Mn this
quarter after USD25.4 in 3QFY14) and very strong growth in revenue
from new customers (adding USD51.6Mn this quarter after USD31.9 in
3QFY14) indicating that hunting has resulted in big logo wins that go
beyond the penetrate-and-radiate model of traditional Indian IT.
Management also affirmed this view saying that their hunting win-rates
have improved substantially and the pipeline was strong particularly
for manufacturing.

$ Positive leading indicators in traction even excluding Opus CMC:
Even assuming that the entire USD17.4Mn/USD17.9Mn incremental revenue
in BPO/Financial Services came from Opus CMC, revenue traction has
been fairly broad-based across horizontals/verticals (see exhibit-7).
Manufacturing & Hi-tech was the only vertical that showed negative
growth but management indicated that Retail vertical had come in below
their expectations. Clients metrics have also shown improvement with 7
client additions to the USD10Mn+ tier.

$ Margins improve as expected, but core IT Services margins above
expectations:  While overall EBITDA margins came in only 22bps ahead
of our expectations, the EBIT margins in the core IT Services business
improved 93bps ahead of our expectations. Headcount was sharply below
our expectations and Wipro’s management suggested that headcount
additions will continue to lag revenue growth given their focus on
automation and also the room to improve utilizations. Utilizations
excluding trainees and support were up 220bps QoQ to 76.5% but still
have room for further improvement.

$ Guidance for next quarter muted, but we expect higher profitability:
With traditional big-box retailers like Best Buy having shown some
weakness over the holiday season, we are not surprised that Wipro has
expressed concerns over its Retail vertical’s growth momentum. But
given the other positive signs including improved traction from new
accounts, we think concerns over next quarter’s muted guidance are
overblown.  While we’ve lowered revenue estimates for FY15E, we have
increased our PAT estimates. We also expect Wipro to have stronger
growth over FY16E than we’d assumed earlier. We maintain our Buy
rating with a TP of Rs670 (14x FY16E EPS).



Thanks & Regards

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