Wipro's Q2FY19 results (Neutral) - Margin recovery but guidance doesn’t imply acceleration
Q2FY19 result highlights
- Inline revenues, margin performance better: IT Services revenues came 0.7% qoq (+2.8% qoq in CC terms) and up 1.3% yoy. Revenues of US$2,041m were inline with expectations (IDFCe US$2040 m). Adjusted IT services EBIT margins at 18% against our estimate of 16.5%. Reported IT services EBIT margins was at 14.6% due to write off of Rs5.1bn. Overall revenue came in at Rs145.4bn (IDFCe: Rs144bn), +6.2% qoq. Reported PAT came in at Rs18.8bn (adj Rs24bn) vs IDFCe Rs21.4bn.
- Like for like (L-F-L) guidance for Q3 doesn’t imply acceleration: IT services reported revenue guidance of US$2028-US$2068m implies -0.6% to +1.3% qoq growth in Q3FY19. However excluding India government (L-F-L) the guidance implies 1%-3% qoq growth.
- Margin performance get better: Wipro used to operate at margins of 20-22%, but had seen steady erosion to 15.6%. Management indicated +70bps qoq tailwind from FX but the bigger delta was driven by +180bps qoq net gain on productivity. Improvement on IT services EBIT margin is a positive, but not enough to drive upgrades as we would like to see more consistent delivery and we are already building in 17% IT-EBIT margin for FY20E.
Key positives: Growth in Americas and BFSI
Key negatives: Weakness in Europe
Impact on financials: FY19/FY20/FY21 EPS estimates unchanged.
Valuations & view
Overall a mixed quarter from Wipro with better margin performance but muted guidance. Wipro continues to have a component of inorganic contribution to growth and the earlier quarter commentary suggested a likely pickup in 2H. The guidance, even of L-F-L basis, doesn’t seem to imply this. 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 of 4.3% over FY18-20E below peers valuations are fair given growth momentum. Retain Neutral with an unchanged target price of Rs315.
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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