Wipro's Q2FY20 results (Underperformer) - Tax benefits aside, underperformance likely to continue
Q2FY20 result highlights
- Marginally below expectation on growth and guidance: WPRO posted CC revenue growth of 1.1% q-q (vs est. of 1.4%) and guided for 0.8-2.8% q-q growth in 3Q (vs our expectation of 1-3% q-q), this includes ~70bps inorganic contribution (Vara Infotech and ITI) on our calculation. On y-y basis, WPRO lagged at 3.8% y-y (vs 11.4%/8.4% y-y at INFO/TCS).
- Sharp cost cuts aid margins: Reduction in miscellaneous expenses and bad debt provisions aided IT services (incl ISRE) EBIT margins by ~100bps. This cushioned wage hike and lower utilization impacts. IT services (incl ISRE) EBIT margins increased by 40bps q-q to 17.7%. We look for EBIT margins of 17.4/17/16.5% over FY20/21/22E (vs 17.5% in 1HFY20).
- BFSI, Europe/ROW, top clients drag, even as consumer recovers: As seen at INFO/TCS, BFSI outlook is weak and growth slowed to 5.9% y-y in CC terms (versus 16% y-y a year ago). Europe and ROW (~40% of revenue) showed y-y declines and top-10 clients declined by 4% q-q in USD terms. Consumer vertical, inline with company indications improved sequentially posting 4.1% q-q growth.
Key positives: Improvement in consumer vertical, strong cost control and lower ETR indications at 20-21% for FY20/21E.
Key negatives: Weak performance and outlook in BFSI, Europe and top clients.
Impact on financials: ~1.5-2% EPS increase in FY20/21E on lower taxation.
Valuation and view
While a temporary reprieve is possible on lower ETR going forward, we retain Underperformer on WPRO on 1) Likely continued growth underperformance versus peers. We look for USD revenue CAGR of 4% (vs 7-11% at TCS/INFO/HCLT) over FY19-22E 2) Weakness in past performing segments (BFSI) and continued sluggishness in Healthcare/manufacturing and 3) Peaking out of IT services EBIT margins (ex ISRE), which fell ~170bps over last 3 quarters, despite sharp cuts in miscellaneous expenses and bad debt provisions. These cost are likely to normalize and with tepid growth material margin leverage looks difficult. We look for USD revenue/EPS CAGR of 4/6% over FY19-22E, with IT EBIT margins (incl ISRE) dropping to 16.5% (130bps decline over this period). Our TP is based on 13.5x 1 yr forward EPS upto Sep-21E of INR18.1. We prefer HCLT and INFO within large cap IT.
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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