Wipro's Q4FY18 results (Neutral) - Weak guidance disappoints
Q4FY18 result highlights
- Revenues inline but miss on margins: IT Services revenues came in up 2.4% qoq (+1.1% qoq in CC terms) and up 5.5% yoy. Revenues of US$2,062m were ahead of expectation (IDFCe US$2058m). Reported IT margins were down to 14.4% on account of one-time customer impact of (as announced in profit warning). Adjusting for this the IT margins at 16% were behind our estimate of 17%. Overall revenue came in at Rs137bn (IDFCe: Rs141bn), +0.7% qoq. EPS at Rs4.0 (IDFCe : Rs4.5), down -14 % qoq.
- Customer specific issues feed into weak guidance: IT services revenue guidance of US$2015-US$2065m implies -2.3% to 0% qoq growth in Q1FY19 is much weaker than expectation (IDFCe: 0-2%). Management indicated customer specific issue in telecom (2 clients filing for bankruptcy) and continued weakness in HPS will weigh on growth. We do note that management has been making progress on customer mining but such loss of growth momentum does reflect volatility in execution.
- Margin improvement likely backended: Wipro used to operate at IT margins of 20-22%, but this has seen steady erosion to 6% over past 2 years. Management intends to improve margins in FY19 but we think this is likely to be back ended considering wage hikes (effective June 2018) and weak revenue momentum in 1H. We are building in margins to recover to 17.5% by FY20E.
Key positives: Growth in Europe and BFSI
Key negatives: Weak guidance and margins
Impact on financials: FY19 EPS estimates cut by 3.3%. FY20 estimates intact.
Valuations & view
Wipro continues to show execution volatility. While strategic initiatives around client mining and digital are yielding early results, but either customer specific challenges or select verticals erode the gains. We would like to see more consistent execution before we get constructive on the name. We expect revenue CAGR of 5% over FY18-20E below peers and we think valuations at 14.5x FY20 PE is fair given growth momentum. 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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