Rating: Buy; Target Price: Rs660; CMP: Rs577; Upside: 14.4%
Returning to growth as anticipated
Wipro reported results in line with our expectations but margins were
slightly lower than anticipated due to higher Sales & Marketing (S&M)
investments. While developed markets grew by a slower pace than in the
last 9m, India, Mid-East and APAC grew strongly. With good deal-wins
in the developed markets and a reportedly strong pipeline, we expect
Wipro to perform slightly better than our earlier expectations. We
revise our FY15 margin estimates downward to account for large deal
transitions, increase our FY16 estimates and retain our Buy rating
with a TP of Rs660 based on 15x Jun-16E EPS.
$ Revenue growth in-line with expectations: Though Wipro’s revenues
came in line with our expectations; it has come in below the mid-point
of its guidance in realised currency terms (at USD1740.2Mn Vs
USD1750Mn). We were also surprised by the weak revenue additions in
North America (up only USD6.5Mn QoQ) and Europe (down USD1Mn QoQ)
after three quarters of consistently strong revenue additions (see
exhibit-7). Management suggested that client-specific issues in Retail
were largely responsible and that they expect the weakness to persist
for another quarter.
$ Sales & Marketing investments drag down margins below our
expectations: Sales & Marketing investments overall increased 7.6%
QoQ to INR7,557Mn (6.72% of revenue Vs 6.0% in 4QFY14). The margin
impact of wage hikes was in line with our expectations while
depreciation was lower than anticipated. Onsite revenue proportion
increased 20bps QoQ to 54.3% and we note that Fixed Price revenue
proportion increased further by 80bps to 52.1% (up 470bps YoY). While
billing realisation rates (calculated by us) were lower QoQ by nearly
1.2%, we think that is due to initial stages of execution of Fixed
Price contracts.
$ Investments in S&M over FY13-14 paying off; new deal flexibility
refreshing: With the urgency shown by the management to retain and
improve market-share, we expect the sales & marketing investments made
over the past few years will start paying off. We note that Sales &
Marketing for IT Services averaged just 5.5% over FY11-12 and has
since been increased to an average of 6.7% over FY13-14. Deals such as
ATCO also indicate a flexibility to gain market share in what we view
as a crucial window of opportunity to gain credentials in large
outsourcing deals. We think Wipro is better positioned strategically
due to recent large wins.
$ Expecting improved traction over FY16, retain Buy: While we expect
near-term margins to remain under pressure due to the transition of
recent large deal wins including Takeda Pharma and the ATCO
outsourcing deal, we expect margins to improve over FY16E and growth
to be even stronger over FY16E than anticipated (at 12.5% YoY in USD
terms Vs 11.4% earlier). We continue to value Wipro at 15x Jun-16E EPS
and arrive at a new TP of Rs660. We continue to recommend Buy.
Thanks & Regards
��
Returning to growth as anticipated
Wipro reported results in line with our expectations but margins were
slightly lower than anticipated due to higher Sales & Marketing (S&M)
investments. While developed markets grew by a slower pace than in the
last 9m, India, Mid-East and APAC grew strongly. With good deal-wins
in the developed markets and a reportedly strong pipeline, we expect
Wipro to perform slightly better than our earlier expectations. We
revise our FY15 margin estimates downward to account for large deal
transitions, increase our FY16 estimates and retain our Buy rating
with a TP of Rs660 based on 15x Jun-16E EPS.
$ Revenue growth in-line with expectations: Though Wipro’s revenues
came in line with our expectations; it has come in below the mid-point
of its guidance in realised currency terms (at USD1740.2Mn Vs
USD1750Mn). We were also surprised by the weak revenue additions in
North America (up only USD6.5Mn QoQ) and Europe (down USD1Mn QoQ)
after three quarters of consistently strong revenue additions (see
exhibit-7). Management suggested that client-specific issues in Retail
were largely responsible and that they expect the weakness to persist
for another quarter.
$ Sales & Marketing investments drag down margins below our
expectations: Sales & Marketing investments overall increased 7.6%
QoQ to INR7,557Mn (6.72% of revenue Vs 6.0% in 4QFY14). The margin
impact of wage hikes was in line with our expectations while
depreciation was lower than anticipated. Onsite revenue proportion
increased 20bps QoQ to 54.3% and we note that Fixed Price revenue
proportion increased further by 80bps to 52.1% (up 470bps YoY). While
billing realisation rates (calculated by us) were lower QoQ by nearly
1.2%, we think that is due to initial stages of execution of Fixed
Price contracts.
$ Investments in S&M over FY13-14 paying off; new deal flexibility
refreshing: With the urgency shown by the management to retain and
improve market-share, we expect the sales & marketing investments made
over the past few years will start paying off. We note that Sales &
Marketing for IT Services averaged just 5.5% over FY11-12 and has
since been increased to an average of 6.7% over FY13-14. Deals such as
ATCO also indicate a flexibility to gain market share in what we view
as a crucial window of opportunity to gain credentials in large
outsourcing deals. We think Wipro is better positioned strategically
due to recent large wins.
$ Expecting improved traction over FY16, retain Buy: While we expect
near-term margins to remain under pressure due to the transition of
recent large deal wins including Takeda Pharma and the ATCO
outsourcing deal, we expect margins to improve over FY16E and growth
to be even stronger over FY16E than anticipated (at 12.5% YoY in USD
terms Vs 11.4% earlier). We continue to value Wipro at 15x Jun-16E EPS
and arrive at a new TP of Rs660. We continue to recommend Buy.
Thanks & Regards
No comments:
Post a Comment