Wipro Ltd - Q4FY14 Result Update - Revenue misses estimate, but positive leading indicators - Centrum

Rating: Buy; Target Price: Rs670; CMP: Rs572; Upside: 17%

Revenue misses estimate, but positive leading indicators

While Wipro's revenue was slightly below our expectations, we were heartened by several positive leading indicators such as continued strong traction in Europe and strong new client revenue growth even excluding Opus CMC. Europe contributed another strong quarter while revenue additions continued across all verticals except Manufacturing & Hi-Tech. Margins improved as expected as utilization improved and headcount net employee addition remained slightly negative. We retain our Buy rating with a 1-Year TP of Rs670.

Organic growth below expectations but Europe momentum a positive: While revenue growth was below our expectations, we are heartened bycontinued strong growth in both Europe (adding USD19.3Mn this quarter after USD25.4 in 3QFY14) and very strong growth in revenue from new customers (adding USD51.6Mn this quarter after USD31.9 in 3QFY14) indicating that hunting has resulted in big logo wins that go beyond the penetrate-and-radiate model of traditional Indian IT. Management also affirmed this view saying that their hunting win-rates have improved substantially and the pipeline was strong particularly for manufacturing.

Positive leading indicators in traction even excluding Opus CMC: Even assuming that the entire USD17.4Mn/USD17.9Mn incremental revenue in BPO/Financial Services came from Opus CMC, revenue traction has been fairly broad-based across horizontals/verticals. Manufacturing & Hi-tech was the only vertical that showed negative growth but management indicated that Retail vertical had come in below their expectations. Clients metrics have also shown improvement with 7 client additions to the USD10Mn+ tier.

Margins improve as expected, but core IT Services margins above expectations: While overall EBITDA margins came in only 22bps ahead of our expectations, the EBIT margins in the core IT Services business improved 93bps ahead of our expectations. Headcount was sharply below our expectations and Wipro's management suggested that headcount additions will continue to lag revenue growth given their focus on automation and also the room to improve utilizations. Utilizations excluding trainees and support were up 220bps QoQ to 76.5% but still have room for further improvement.

Guidance for next quarter muted, but we expect higher profitability: With traditional big-box retailers like Best Buy having shown some weakness over the holiday season, we are not surprised that Wipro has expressed concerns over its Retail vertical's growth momentum. But given the other positive signs including improved traction from new accounts, we think concerns over next quarter's muted guidance are overblown. While we've lowered revenue estimates for FY15E, we have increased our PAT estimates. We also expect Wipro to have stronger growth over FY16E than we'd assumed earlier. We maintain our Buy rating with a TP of Rs670 (14x FY16E EPS).

Source : Equity Bulls

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