EUR 850.00 For Business Accounts Only

Morningstar | Like Peers, Wipro Has a Slower-Than-Expected Start to the Year; Shares Fairly Valued

Wipro’s management said that its first fiscal quarter was slower than expected after the company recorded a sequential decline in revenue growth. The sequential non-GAAP IT services revenue decline of 0.7% was still within the firm’s guidance of negative 1% to positive 1%, but we suspect Wipro’s true aim was to be in positive territory in order to set an optimistic tone for the rest of the year. Echoing other IT services peers, Wipro noted macroeconomic uncertainties and customer-specific issues as having the primary impact in the quarter. Capital markets, banking in Europe, and softness in manufacturing and healthcare, were all cited as areas that needed improvement. We don’t expect a quick turnaround in these markets, yet Wipro’s pipeline of work remains healthy and some first-quarter start date deferrals are expected to commence in the second quarter. With our outlook unchanged after the uninspiring first quarter, we reiterate our INR 270 per share fair value estimate ($3.85) and narrow economic moat rating. Shares are trading close to our fair value, so we’d recommend a wider margin of safety before committing new capital to the name.

For the quarter, adjusted IT services revenue rose 4.3% year over year to $2.04 billion (adjusted non-GAAP constant currency IT services revenue grew 5.9% year over year). As expected, Wipro’s digital revenue was the growth driver, offsetting legacy revenue streams. First-quarter digital revenue surged 34.6% year over year and constituted 37.4% of the firm’s total revenue. We continue to see digital demand as a long-term growth driver for the business and believe Wipro is aptly positioned to benefit from this secular force. In terms of business practices, digital operations and platforms, and data, analytics, and artificial intelligence were the standouts and reflect clients’ heightened need for operational digitization and better organizational insights.

On a positive note, Wipro’s first-quarter operating margin was robust. The firm’s margin increased 80 basis points year over year to 18.4%, which was helped by positive foreign exchange effects and operational improvements around automation. To that end, we were surprised by the strong sequential increase in fixed-price engagements in the quarter at 61.6%, up from 60.0% last quarter. We continue to see leverage in automation and utilization to help modest midterm margin expansion.