Wipro, Mean reversion… :: ICICI Securities

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Mean reversion…
• IT services constant currency (CC) revenues grew 3.7% QoQ (2.1-4%
guidance) while dollar revenues grew 1.3% QoQ to $1,795.4 million
(1% QoQ, $1,789 million estimate)
• IT services EBIT margins declined 18 bps QoQ to 21.8%, marginally
below our 22% estimate. Reported PAT of | 2,193 crore was above
our | 2,104 crore estimate
• Wipro gave Q4FY15E revenue growth guidance of $1,814 million to
$1,850 million (1-3% QoQ growth)
Q4 guidance appears reasonable given it factors energy vertical weakness
Wipro has guided for 1-3% revenue growth in Q4FY15E, which appears
reasonable given it factors in potential project ramp-downs by energy and
utility customers. The company highlighted that a significant fall in
commodity prices could create near-term IT spending headwinds for
these customers. However, in the longer term, it could create significant
opportunities in cost optimisation deals. The overall demand environment
commentary was optimistic across all verticals (excluding oil & gas) and
geographies, including the US and Europe, and could help improve the
growth trajectory going into FY16E. However, we would watch energy
sector demand trends in Q4 before revisiting our growth estimates.
Adjusted margins up 40 bps QoQ but below our estimates…
IT services EBIT margins declined 18 bps QoQ & 123 bps YoY to 21.8% as
efficiency and fixed price productivity gains were offset by cross currency
impact and utilisation. Note, Q2 margin includes ~60 bps positive impact
related to gain from sale of strategic investment, excluding which Q3
margins would have risen 40 bps QoQ. That said, 9MFY15 margin profile
of 22.2% is marginally higher than FY09-14 average of 22% & represents
an improvement of ~40 bps vs. 9MFY14 primarily led by automation and
rupee (utilisation is up 450 bps to 75.9% in Q3FY15 vs. 71.4% in Q1FY14).
We continue to model FY15E consolidated margin improvement of 50
bps YoY to 20.9% primarily led by growth and efficiency.
Client metric continues to be stable…
The client metric continues to be generally healthy. Clients contributing
>$75 million and >$10 million in revenue on an LTM basis increased by
one and four to six and 69, respectively, while >$100 million bucket was
stable QoQ at 10. Further, >$1, >$3 million buckets saw healthy QoQ
additions of two and seven, respectively.
Utilisation moderates sequentially but still up 300 bps YoY…
Utilisation (ex-trainees) declined 150 bps QoQ led by lower number of
days. However, automation initiatives in the traditional ADM business
helped improve utilisation by 300 bps YoY to 75.9%. Net utilisation
(excluding support) and net utilisation (excluding trainees) declined 160
bps and 60 bps to 75.9% and 78.8%, respectively. That said, the
management reiterated that utilisation could improve from current levels.
Attrition continues to be stable both on a QoQ and YoY basis.
Modest valuation, upbeat commentary continues to dictate BUY
We estimate Wipro will report revenue and EPS CAGR of 8% and 11% in
FY14-16E (average 22.9% IT services EBIT margins in FY15-16E), vs. 14%
each, reported in FY09-14 (average 21.9% margins), respectively, led by
large deal ramp ups, client mining initiatives and pick-up in discretionary
spending. We raise our target multiple (16.7x vs. 15.7x earlier) and price
(| 650 vs. | 610) to account for improving outlook & maintain BUY rating

LINK
http://content.icicidirect.com/mailimages/IDirect_Wipro_Q3FY15.pdf