Wipro's Q3FY18 results (Neutral) - Uninspiring quarter; Rev and guidance miss
Q3FY18 result highlights
- Revenue and margin miss: IT Services revenues came in flat qoq (+0.9% qoq in CC terms) and up 5.8% yoy. Revenues of US$2,013m were softer than expectation (IDFCe US$2042m). Reported IT margins were down to 14.8% on account of one-time customer impact of Rs3175mn. Adjusting for this the IT margins at 17.2% were behind our estimate of 17.6%. Overall revenue came in at Rs136.6bn (IDFCe: Rs140bn), flat qoq. Adjusted consolidated EBIT margin came in at 16.7% (IDFCe: 16.8%); EPS at Rs4.2 (IDFCe : Rs4.6), up -7 % qoq. Adjusted PAT came in at Rs21.9bn inline with our estimate of Rs21bn.
- Weak guidance in a seasonally strong quarter: IT services revenue guidance of US$2033-US$2073m implies 1% to 3% qoq growth in Q4FY18 is weaker than expectation (IDFCe: 2-3%). This is on a lower base of Q3FY18. Management indicated customer specific issue in the energy vertical and this will weigh on growth. We see weak revenue outlook despite seasonality which would restrict revenue growth to under 5% in FY18E.
- Margin performance subdued: Wipro used to operate at IT margins of 20-22%, but this has seen steady erosion to 17.5% over past 2 years. Given weaker growth and near-term customer specific issues, we believe that margin profile will remain below par. We are factoring in muted margin performance over FY19E-20E.
Key positives: Growth in Europe
Key negatives: Soft guidance and margins; Challenges in Energy
Impact on financials: FY19-20 EPS estimates cut by 0.8%-1%.
Valuations & view
Wipro continues to lag peers in-terms of growth and has even given up margins to push growth. While strategic initiatives around client mining and digital are yielding early results, but challenges in select verticals erode the gains. On the other hand, despite widening margin gap with peers, we are surprised to see the convergence of valuations multiples (trading at 17x FY19E), which is now at par with Infosys. We expect revenue CAGR of 5% over FY17-19E below peers and as a result we see downside risk to multiples given growth and margin differential. Retain Neutral with a target price of Rs290 (set at 14.5x FY20E EPS).
Wipro is an information technology group based in India. Co. is engaged in the provision of information technology services. Co. is active as a global IT services company that provides a range of IT services, software solutions, IT consulting, business process outsourcing, or BPO, services and research and development services in the areas of hardware and software design to companies worldwide. Co. also provides outsourced research and development, infrastructure outsourcing and business consulting services. Co.operations are organized along two business segments: IT Services and IT Products.
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