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Morningstar | Wipro Posts Good Growth and Margins in Q3; Digital and Automation Tailwinds; Shares Near Fair Value

Following in the footsteps of TCS and Infosys this earnings cycle, Wipro reported a good third-quarter result with gross revenue up double-digits on a year-over-year basis. Additionally, the firm’s IT services operating margin expanded significantly to 19.8% over the same time, illustrating the company’s increasing shift to higher value digit services and its utilization of automation throughout the business. It was encouraging to see Wipro remaining competitive versus larger peers with the firm growing its digital business 35.4% year over year to compose 33.2% of overall revenue. We continue to see Wipro’s digital business as its growth savior with the firm’s legacy outsourcing and business process outsourcing businesses facing secular stagnation and price compression. We think Wipro can remain relevant in digital transformation services, and new multinational customer wins helps to support this notion. Nevertheless, our midterm outlook for Wipro is unchanged after the quarter and we retain our INR 325 ($4.45) fair value estimate and narrow economic moat rating. With shares appreciating substantially since we recommended them during the middle of 2018, and now modestly above our fair value estimate, we’d suggest a wider margin of safety before committing new capital to the name.

Gross revenue grew 10.2% year over year to INR 150.6 billion ($2.2 billion). Reported IT services revenue improved 1.8% sequentially to $2.05 billion (adjusted non-GAAP constant currency IT services revenue increased 7.0% year over year). Among the firm’s IT services verticals, banking and financial services, consumer, and energy and utilities all grew over 10% year over year in constant currency. We’ll continue to monitor the health of the banking and financial services as a key barometer for the Indian IT services market due to the importance and size of this market. For now, we believe there is more confidence in this key vertical which bodes well for growth in the near term.

In terms of margins, Wipro’s operating margin expanded 496 basis points year over year to 19.8%. The significant margin expansion was attributable to the firm’s focus on automation. Wipro’s leverage of its hyper-automation platform, HOLMES, was the key factor in the margin performance and an area we see additional leverage. To quantify this automation tailwind, we note that Wipro’s workload delegated to automation bots in fixed price contracts grew to 6.7% of work in the third quarter, which was up from 3% of work in the second quarter. Additional support has been provided by Wipro’s ongoing services mix toward fixed price contracts (59.8% of work in the third quarter), and we believe the firm can eke out better margins from fixed price contracts.