Wipro's Q1FY19 results (Neutral) - CC revenue beat but margin performance subdued
Q1FY19 result highlights
- Revenues inline but miss on margins: IT Services revenues came -1.7% qoq (+0.1% qoq in CC terms vs. IDFCe : -1% qoq) and up 2.8% yoy. Revenues of US$2,026.5m were inline with expectations (IDFCe US$2026 m). Adjusted IT services EBIT margins at 15.5% against our estimate of 16%. Reported IT services EBIT margins was at 17.2% due to gain on DC sale. Overall revenue came in at Rs139bn (IDFCe: Rs142bn), +1.5% qoq. EPS at Rs4.7 (IDFCe : Rs4.4), up 17.6 % qoq.
- Like for like (L-F-L) guidance for Q2 is tad better than Q1 performance: IT services reported revenue guidance of US$2009-US$2049m implies -0.9% to +1.1% qoq growth in Q2FY19. However excluding data center (L-F-L) the guidance implies 0.3%-2.3% qoq growth. This is tad better than expectations and reflects some acceleration from Q1 levels.
- Margin performance needs to get better: Wipro used to operate at margins of 20-22%, but this has seen steady erosion to 15.6% in this quarter. Management expects to deliver 16% margins in Q2FY19E, despite the impact of 2 months of wage hike in Q2FY19E. We are building in margins to recover to 17% by FY20E.
Key positives: Growth in Americas and BFSI
Key negatives: De-growth in Europe
Impact on financials: FY19/FY20 EPS estimates cut by 4%/1%.
Valuations & view
Overall an inline quarter from Wipro with CC revenue beat but miss on IT services margins. While strategic initiatives around client mining and digital are yielding early results, but execution needs to become more consistent. We think that Wipro is more levered to a broad-based uptick in tech spending and a more consistent delivery on market share gains and growth is needed for re-rating. We estimate a revenue CAGR of3.9% over FY18-20E below peers and we think valuations at 14x FY20 PE are fair given growth momentum. Retain Neutral with an unchanged target price of Rs290 (set at 14.5x FY20E EPS).
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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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