Wipro Ltd. - Q3FY14 Update, CMP Rs.573, Maintain HOLD, Increased Target of Rs.612 - Sushil Finance

USD Revenues in line with guidance; Q4FY14 Guidance provides growth stability

During Q3FY14, Wipro's IT Services Revenue in USD term grew 2.9% QoQ to 1,678.4 mn, which was in line with its guidance (USD 1,660-1,690 mn), while in constant currency it grew by 2.3% QoQ to USD 1668 mn. In INR term its IT Services Revenues grew 2.6% QoQ to Rs. 103,274 mn, while total Revenues grew 4.6% QoQ to Rs. 112,713 mn, as its IT products business grew 8.3% QoQ to Rs. 10,155 mn. The management witnessed uptick in discretionary spending especially in US market during the quarter, while the deal pipeline and conversion rates have also improved. It has provided growth guidance of 2-4% for its IT Services Revenue in Q4FY14 which is likely to be in range of USD 1712-1745 mn. The management also indicated FY15 growth to be better than FY14 and in line with industry. We expect the company to deliver ~USD 1730 mn of Revenue from its IT services business in Q4FY14.

EBIT Margins expand 54 bps on Operational efficiency

Its EBIT of IT Services biz grew 5.1% QoQ to Rs. 23,790 mn, while the EBIT margins expanded 54 bps QoQ to 23%, mainly due to operational efficiency lessening the impact of INR appreciation (Average Rs/USD rate at 61.53 vs. 61.73 in Q2). Its consolidated EBIT grew 4.4% QoQ to Rs. 23,418 mn, while the margins remained flat QoQ at 20.8%. Its APAT grew 4.3% QoQ to Rs. 20,147 mn. The management indicated its EBIT margins to remain stable going forward with some positive bias as Revenue growth picks-up and productivity improves. Considering these factors, we expect Wipro to deliver consolidated EBIT margins of 20.2% in FY14 vs. 18.7% in FY13.

Decent Deal closures & Deal pipelines

During Q3, Wipro witnessed decent deals pipeline and uptick in discretionary spending. The new client additions remained decent as it added 42 new clients as against 45 clients added in Q2, while the total number of active customers increased to 966 from 942 in Q2. It also saw an increase in numbers of its USD 100+ mn & USD 50+ mn accounts by one each. The growth was broad based across the geographies, service lines & verticals. In terms of strategic business units (SBUs), healthcare, energy & utilities, and financial services grew 7.6%, 4.8% & 3.1% respectively. In terms of markets, Americas, Europe and India including ME regions grew 3.2%, 5.4% & 5.5% respectively, while within service lines, the growth was led by GIS, BPO, and product engineering, which grew by 5.6% 4.1% and 3.0% respectively on QoQ basis. With clients budgets expected to be flat to positive, going forward, the management expects the growth from US & other markets to pick up and pricing to remain stable.

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 and currently has net cash of Rs. 110 bn with strong RoCE (26%) & RoE (24%). We expect the company to improve its return ratios in ensuing period.

OUTLOOK & VALUATION

In view of decent Q4FY14 guidance and FY15 growth outlook, we have upgraded our FY14E & FY15E Revenues & APAT estimates. We now expect its FY14E & FY15 Revenues to grow by 15.9% & 18% to Rs.433.7 bn & Rs.511.7 bn respectively, while expect its APAT to increase by 24.9% & 15.7% to Rs.76.6 bn & Rs.88.6 bn in FY14E & FY15E respectively. The CMP of Rs.573 discounts its FY14E & FY15E Earnings of Rs. 31.1 & Rs. 36 by 18.4x & 15.9x respectively. Considering the recent run-up in the price, we maintain our 'HOLD' rating on the stock and increase our price target to Rs.612, valuing at 17x its FY15E earnings.

Source : Equity Bulls

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