EUR 850.00 For Business Accounts Only

Morningstar | Wipro Hits Guidance; Weakness Expected Next Quarter; Shares Look Slightly Overvalued. See Updated Analyst Note from 16 Apr 2019

Wipro reported an in line end to the fiscal year with guided IT services revenue landing in the middle of our expectations. The overall yearly performance was characterized by middling top-line growth as the firm continued to restructure and transform the business toward being a high growth and in-demand provider of digital transformation services. We see this pivot as being a successful counterbalance to the legacy application and engineering outsourcing business, and the firm recorded year-over-year digital services growth of 32.2% (constituted 35% of the firm’s overall revenue in fiscal 2019). Still, the IT services market remains fiercely competitive and the digital market is attracting all competitors. We think Wipro will be able to carve out its fair share of large digital transformation projects but see long-term competition as keeping a lid on Wipro’s midterm growth. Fiscal 2020’s outlook was fairly weak for the first quarter with Wipro citing the completion of projects and some delayed starts. However, momentum is expected to pick up in the back half of the fiscal year, which is supported by the firm’s order book and healthy looking pipeline of work. After accounting for the outlook and rolling our model forward, we have modestly raised our fair value estimate to INR 270 from INR 245 (raised to $3.85 from $3.47, which also accounts for an updated USD/INR rate of 70) for this narrow-moat firm. With shares above our fair value estimate, we’d seek a wider margin of safety before investing in the company.

For the quarter, gross revenue increased 9.0% year over year to INR 150.1 billion ($2.2 billion). IT services revenue grew 1.4% sequentially to $2.08 billion. Banking, Financial Services, and Insurance and Consumer were the two standout performers in the quarter with both segments growing in the mid-teens on a year-over-year constant currency basis. The quarterly segment performance largely reflected the year’s performance. On the other end of the spectrum, Health, Manufacturing, and Technology didn’t fare so well with all three businesses recording declines in the quarter. We expect to see some choppiness in the health and manufacturing markets over fiscal 2020.

IT services operating margin improved 180 basis points year over year to 17.9%. Wipro noted that a focus on utilization, offshoring, automation, and an improvement in attrition helped support the margin expansion. We think the firm will continue to use such levers while improving the quality of its revenue by growing its digital services line. In addition, we see the company’s artificial intelligence and fixed price contract focuses as being key long-term margin levers. As such, we forecast modest midterm margin expansion.