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Wipro (WPRO IN) Summary

Core Content

Wipro is a global IT services, consulting, and outsourcing company, and the fourth largest listed Indian IT company with over 175,000 employees. The report provides an analysis of its financial performance and market position, indicating that the company is facing challenges in maintaining revenue growth and profitability.

Main Points

• EPS and Revenue Performance:

  • 1Q19 EPS was in line with expectations at 22% of FY19E.
  • Revenue growth was weaker than the industry average, with a 3-5% cut in revenue forecast due to lower revenue and EBIT margins, primarily impacted by weakness in telecom and healthcare services.
  • Wipro's revenue growth has been lagging since FY12, with 1Q19 showing a QoQ decline of 0.1% due to two client bankruptcies.

• Digital Services Growth:

  • Digital services now contribute 28% of IT service revenue, up from 22.5% in 1Q18.
  • The company has been increasing its local headcount to 58% to mitigate risks from immigration regulations.

• Margin Pressures:

  • EBIT margins dropped by 70bps in 1Q19 due to higher visa and sub-contracting costs, and client write-offs.
  • The report forecasts EBIT margins of 15.7-16.6% for FY19-21E, compared to 16.4% in FY18.

• Valuation and Price Target:

  • The company's core P/E ratio is at 12x, a 20% discount to its 5-year average and lower than peers (14-21x).
  • The price target for FY19E is INR 250, a 10% decrease from the previous target of INR 250.
  • FCF yield of 5%+ and cash at 24% of market cap are seen as positives.

• Industry Position:

  • HCL Tech has overtaken Wipro as the third-largest Indian IT services company in revenue.
  • The report suggests that Tech Mahindra is a preferable alternative to Wipro.

Key Financial Metrics

Revenue by Industry (1Q19)

Revenue by Region (1Q19)

Financial Highlights

• EBITDA Margin: 17.9% in 1Q19, down from 19.8% in 1Q18.
• EBIT Margin: 14.8% in 1Q19, down from 16.2% in 1Q18.
• Pretax Profit Margin: 19.9% in 1Q19, down from 19.0% in 1Q18.
• FCF Yield: 5.9% in 1Q19, with a forecast of 5.6-5.7% for FY19-21E.
• Net Dividend Yield: 0.8% in 1Q19, rising to 3.1% in FY21E.
• ROAE: 17.2% in FY17A, rising to 16.7% in FY21E.
• ROAA: 11.1% in FY17A, rising to 11.5% in FY21E.

Key Risks and Challenges

• Revenue Uncertainty: Continued weakness in telecom and healthcare services.
• Margin Pressure: Higher costs and lower revenue growth affecting EBIT margins.
• Management Changes: Frequent changes and reorganisation impacting growth.
• Client Issues: Client bankruptcies and spending cuts affecting revenue.
• Competitive Position: HCL Tech has overtaken Wipro as the third-largest Indian IT services company.

Conclusion

Wipro faces challenges in maintaining revenue growth and profitability, particularly in its telecom and healthcare segments. While digital services are growing and the company has a strong cash flow, its overall performance is below industry standards. The report recommends a SELL rating and suggests that Tech Mahindra is a better alternative.