15 July 2020
1QFY21 Results Update | Sector: Technology
Wipro
Estimate change
TP change
Rating change
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CMP: INR225
Dark horse, this time?
Multiple factors in favor
TP: INR257 (+14%)
Neutral
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
WPRO IN
5,693
1286 / 17.2
276 / 160
2/2/-6
1198
Wipro’s ability to control costs and collections justifies the improvement in
EBIT margin/cash conversion, despite the sharp drop in revenue. While full
impact of the COVID-19 pandemic on pricing and Working Capital (WC) cycle
is yet to play out, Wipro’s outlook on managing margin stability (v/s Jun’20)
and healthy cash conversions are impressive.
In the current context, some of the verticals (Health BU) – earlier an
overhang – should recover. Additionally, other factors in favor are playing
out, such as (a) upside of a turnaround under a new CEO/strategy, and (b)
possibility of large capital return.
We upgrade our FY21/FY22E EPS by 6%-12%, largely led by margin surprise.
Before turning constructively positive on the stock, we await a refresh of the
company’s strategy and further evidence related to execution. Maintain
Neutral.
Financials & Valuations (INR b)
Y/E Mar
2020 2021E 2022E
Sales
613
608
644
EBIT Margin (%)
17.1
18.0
18.5
PAT
98
98
106
EPS (INR)
16.6
17.3
18.7
EPS Gr. (%)
8.5
3.8
8.5
BV/Sh. (INR)
97.9 113.8 129.1
Ratios
RoE (%)
17.53
16.1
15.2
RoCE (%)
12.8
11.5
11.2
Payout (%)
7.0
13.6
18.7
Valuations
P/E (x)
13.5
13.0
12.0
P/BV (x)
2.3
2.0
1.7
EV/EBITDA (x)
8.2
7.0
5.8
Div Yield (%)
0.54
0.9
1.3
Revenues in line; Margins – a surprise
Wipro reported revenue (USD)/EBIT/PAT growth of -6%/7%/0.1% YoY.
While revenue decline in Americas was largely in line with overall revenue
decline (4.4% YoY, CC), Europe remained a drag (-7.7% YoY, CC).
While other verticals were reasonably resilient, Communications (~17% YoY,
CC) and BFSI (~7% YoY, CC) witnessed the biggest drop in revenue.
Unlike TCS and Accenture, we do not believe Wipro’s Healthcare vertical
(14% of revenue) has benefited much on account of COVID-19.
EBIT margin of IT services segment was surprising (19%, 300bp higher).
Sequentially, margin expansion was driven by (a) operational efficiencies
and cost control (+100bp), and (b) favorable currency (+100bp). Part of this
was offset by the increase in provision for doubtful debts (-50bp impact).
Sub-contracting rationalization led to ~200bp improvement in net utilization.
FCF generation during the quarter remained healthy (158% of net income).
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Focus on profitable growth; Confident outlook on margins
Mar-20 Dec-19 Mar-19
74.0
74.0
73.9
7.0
7.0
6.5
8.9
8.9
9.4
10.1
10.1
10.3
FII Includes depository receipts
Wipro’s new CEO has indicated that the company’s focus is on profitable
growth.
On YoY basis, order book is looking better. Deal pipeline is also stated to be
healthy. As the company enters 2QFY21, deal activity is expected in
Consumer, Technology and Communications while it remains cautious in
other verticals.
In BFSI, there is good demand around RTB and cost optimization spends.
Thought visibility has improved slightly (v/s Mar’20), management has
refrained from providing guidance.
Near-term focus is on tightly controlling incremental spends. The company
has hinted at maintaining IT services’ margins in a narrow band (v/s Jun’20).
Sudheer Guntupalli – Research analyst
(Sudheer.Guntupalli@MotilalOswal.com)
Research analyst: Mohit Sharma
(Mohit.Sharma@MotilalOswal.com) /
Heenal Gada
(Heenal.Gada@MotilalOswal.com)
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.