Wipro: A new year surprise:: Kotak Securities

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A new year surprise. Wipro took us by surprise with a strong 3.7% constant-currency
revenue growth. This pleasant surprise was courtesy ramp-up of large deal wins. What
is a surprise can become a permanent feature if the company manages to get account
mining and new deal wins firing in tandem. In any case, current inexpensive valuations
do not demand superlative performance. Even one engine working well can deliver
reasonable upside in the stock. Maintain ADD rating with TP of `650 (`675 earlier).

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A big surprise of 3.7% constant-currency revenue growth
Wipro’s 3.7% sequential constant-currency growth comes well ahead of peers in a seasonally
weak quarter. Cross-currency headwinds of 240 bps restricted growth in US$ terms to 1.3%.
Broad-based growth gives a lot more comfort on improving execution. Healthcare, retail and
CPG, media and telecom and BFSI contributed. IMS delivered strong growth (+3.3% qoq) and
BPO (+4.6% qoq) was back to growth. Growth from developed markets (US: +2.6% in c/c) was
an encouraging aspect of performance. EBIT margin at 21.8% was up 40 bps (on adjusted
basis); benefit of rupee depreciation more than offset the cross-currency headwinds and decline
in utilization rate. SG&A expenses were at a multi-quarter low and require closer monitoring.
Net profit of `21.9 bn was 4% higher than our estimate.
Client mining and large deals engine ought to fire simultaneously for catch-up with peers
Wipro’s robust and broad-based growth is heartening and suggests that large deals won over
the past few quarters are showing up in numbers. The large deal pipeline of Wipro is robust.
Strong hiring in the past two quarters is also a good indicator of demand—deals reported in the
media and announced by the company in the past two quarters add up to ~US$2.1 bn. Wipro,
however, disappointed on client mining with decline in revenues from Top-10 clients. Weaker
profile of clients and slippage in execution are to blame. It is imperative for client mining of
Wipro to improve without letting the momentum slip in new deals in case it has to narrow the
gap with industry growth rate in FY2016E. Wipro has guided for 1-3% constant-currency
growth for the March 2015 quarter. The guidance builds in the impact of slowdown/decline in
revenues from the energy and utilities vertical.
Safety-in-multiples makes Wipro a good bet; good current quarter is an added bonus
Wipro trades at undemanding trough-to-mid-cycle multiple of 14X FY2016E earnings. The stock
offers solid safety-in-multiples and can deliver 17% return over the next 12 months with moderate
expectations of growth. We retain our constructive stance given undemanding valuations and
improving performance at the margin. We cut our FY2015-17E revenue and EPS estimates by
0-1% and 1-5% due to (1) higher-than-expected cross-currency impact and (2) as we do not
assume any margin benefit resulting from KIE economist’s forecast of rupee depreciation.
We maintain ADD rating but cut target price to `650 from `675 earlier.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily19012015tn.pdf