Wipro Ltd. - Q4FY14 Update, CMP Rs.531, Rating Changed to Buy, Increased Target of Rs.646 - Sushil Finance

WIPRO LTD. - Q4FY14 RESULT UPDATE

CMP Rs.531, Rating Changed to Buy, Increased Target of Rs.646

USD Revenues in line with guidance; Q1FY15 Guidance remained muted

During Q4FY14, Wipro's IT Services Revenue in USD term grew 2.5% QoQ to 1,720.2 mn, which was in line with its guidance (USD 1,712-1,745 mn) while in constant currency it grew by 2.3% QoQ to USD 1,717.4 mn. In INR term its IT Services Revenues grew 2.8% QoQ to Rs. 106,193 mn, while total Revenues grew 3.4% QoQ to Rs. 116,535 mn, as its IT products business grew 9.2% QoQ to Rs. 11,090 mn. The management witnessed uptick in discretionary spending in healthcare Retail banking, utilities, auto, pharma & manufacturing segments, and highest ever conversion rates and deal pipelines during the quarter. However, it has provided a muted growth guidance of -0.3% to 2% for its IT Services Revenue (USD 1715-1755 mn) in Q1FY15 mainly on account of India business, which remains traditionally weak during Q1. The management expects the growth to be strong in Q2 and FY15 growth to be much better than FY14. We expect its IT services business to deliver ~USD 1735 mn of Revenue in Q1FY15 and 10.4% growth in USD term during FY15.

EBIT Margins expand 150 bps on Operational efficiency & productivity improvement

Its EBIT of IT Services biz grew 9.5% QoQ to Rs. 26,054 mn, while the EBIT margins expanded 150 bps QoQ to 24.5%, due to operational efficiency & improvement in productivity (Net utilization excl. trainee 76.5% vs. 74.3% in Q3) and marginal benefits of INR/USD rate (Average INR/USD rate at 61.73 vs. 61.53 in Q3). Its consolidated EBIT grew 10.2% QoQ to Rs. 25,810 mn, while the margins improved 140 bps QoQ to 22.1%. Its APAT grew 10.5% QoQ to Rs. 22,265 mn. The management indicated the EBIT margins of IT Services biz to remain stable going forward with some positive bias as Revenue growth picks-up and productivity improves. However, the margins will be impacted in Q1 & Q2 of FY15, as effective 1st June 2014, it will give wage hikes to its employees (6-8% offshore & 2-3% onsite). Considering these factors, we expect its IT Services EBIT margins to remain at 22.4% in FY15 vs. 22.6% in FY14.

Strong Deal closures & Deal pipelines

The Q4FY14 was the strongest ever quarter for Wipro in terms of deal closures & deals pipeline. Its deal conversion rates have improved more than 50% vs. conversion rates of earlier periods. Wipro expects pricing to remain stable & not witnessing any pricing pressure as its pricing is already at reasonable level. The new client additions remained strong as it added 59 new clients as against 42 clients added in Q3, while the total number of active customers increased to 986 from 966 in Q3. The growth was broad based across the geographies, service lines & verticals. In terms of strategic business units (SBUs), Global media & telecom, healthcare, energy & utilities, and financial services grew 4.3%, 3.1%, 2.9% & 3.9% respectively. In terms of markets, Americas, Europe and India including ME regions grew 2.7%, 4.1% & 4.7% respectively, while within service lines, the growth was led by GIS, BPO, and product engineering, which grew by 3.1% 12.5% and 2.3% respectively on QoQ basis. Going forward, the management expects deal momentum to continue as large deal renewals are expected to happen during the year and Wipro is well placed to convert some of these deals coming for renewals.

OUTLOOK & VALUATION

In view of its Q1FY15 guidance and FY15 growth outlook, we have marginally reduced our FY15E Revenues & APAT estimates. We have also introduced our FY16E estimates. We now expect its FY15E & FY16E Revenues to grow by 11.9% & 14% to Rs.486.1 bn & Rs.554.2 bn respectively, while expect its APAT to increase by 9.8% & 16.5% to Rs.85.6 bn & Rs.99.7 bn in FY15E & FY16E respectively. The CMP of Rs.531 discounts its FY15E & FY16E Earnings of Rs. 34.7 & Rs. 40.4 by 15.3x & 13.1x respectively. Considering its margin expansion, strong deal pipeline, healthy balance sheet with high net cash & return ratios, we remain positive on the stock and change our rating to 'BUY' with increase in our price target to Rs.646, valuing the stock at 16x its FY16E earnings.

Shares of WIPRO LTD. was last trading in BSE at Rs.527.6 as compared to the previous close of Rs. 522. The total number of shares traded during the day was 191255 in over 8098 trades.

The stock hit an intraday high of Rs. 530.7 and intraday low of 518.8. The net turnover during the day was Rs. 100589053.

Source : Equity Bulls

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