Wipro Ltd. -Q2FY14 Update, CMP Rs.470, Maintain HOLD, Target increased to Rs.536 - Sushil Finance

USD Revenues growth in line with Guidance; Q3FY14 Guidance looks decent

During Q2FY14, Wipro's IT Services Revenue in USD term grew 2.7% QoQ to 1,631.1 mn, which was in line with its guidance (USD 1,620-1,650 mn), while in constant currency it grew by 3.2% QoQ to USD 1639.1 mn. In INR term its IT Services Revenues grew 12.7% QoQ to Rs. 100,679 mn, while total Revenues grew 10.7% QoQ to Rs. 107,727 mn, as its IT products business also grew 14.8% QoQ to Rs. 9,374 mn. The management witnessed some uptick in discretionary spending especially in US market during the quarter, while the deal conversion rates have also improved. Considering these factors along with the fact that Q3 traditionally being a soft quarter on account of holidays, it has provided decent growth guidance of 1.8-3.6% for its IT Services Revenue in Q3FY14 which is likely to be in range of USD 1660-1690 mn. The management also indicated FY15 growth to be in line with industry. We expect the company to deliver ~USD 1670 mn of Revenue from its IT services business in Q3FY14.

EBIT Margins expand 250 bps on Currency benefits & Operational efficiency

Its EBIT of IT Services biz grew 26.9% QoQ to Rs. 22,644 mn, while the EBIT margins expanded 250 bps QoQ to 22.5%, mainly due to currency benefits (Average Rs/USD rate at 61.7 vs.56.3 in Q1) & operational efficiency lessening the impact of wage increments. However, its consolidated EBIT grew 26.7% QoQ to Rs. 22,422 mn, while the margins expanded 260 bps QoQ to 20.8%. Its APAT grew 19% QoQ to Rs. 19,321 mn. The management indicated its EBIT margins to remain stable going forward as Revenue growth picks-up and productivity improves. Considering these factors, we expect Wipro to deliver consolidated EBIT margins of 19.5% in FY14 vs. 18.7% in FY13.

Decent Deal closures & Deal pipelines

During the quarter, Wipro witnessed improvement in deal conversion rates and uptick in discretionary spending. The new client additions also remained strong as it added 45 new clients as against 28 clients added in Q1. Two of its accounts have crossed USD 200+ mn in terms of annual business in Q2. The growth was broad based across the geographies, service lines & verticals. In terms of strategic business units (SBUs), healthcare, media & telecom, and financial services grew 5.5%, 4.9% & 2.3% respectively. In terms of markets, US, Europe and APAC regions grew 2.9%, 2.3% & 6.3% respectively, while within service lines, the growth was led by R&D, Business application and product engineering, which grew by 7.4% 4.6% and 3.5% respectively on QoQ basis. Going forward, the management expects the growth from US and other markets to pick up with some visible improvement in demand environment.

Strong Balance Sheet and Return ratios

Over the years, the Company has been generating strong cash flow with decent return ratios and while post this demerger Wipro's balance sheet has improved further with net cash of Rs. 100 bn and strong RoCE (22%) & RoE (21.6%). We expect the company to improve its return ratios further going forward.

OUTLOOK & VALUATION

In view of decent Q3FY14 guidance, favorable currency and FY15 growth outlook, we have upgraded our FY14E & FY15E Revenues & APAT estimates. We now expect its FY14E & FY15 Revenues to grow by 14.6% & 15% to Rs.428.8 bn & Rs.493.1 bn respectively, while expect its APAT to increase by 19.6% & 12.7% to Rs.73.3 bn & Rs.82.7 bn in FY14E & FY15E respectively. The CMP of Rs.470 discounts its FY14E & FY15E Earnings of Rs.29.8 & Rs.33.5 by 15.8x & 14x respectively. Considering the recent run-up in stock, we maintain our 'HOLD' rating on the stock and increase our price target to Rs.536, valuing at 16x its FY15E earnings (based on its 5 year historical forward P/E).

Source : Equity Bulls

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