Centrum - Wipro Ltd - Q2FY16 Result Update - Softness in Energy vertical weighs on growth

Rating: Buy; Target Price: Rs645; CMP: Rs578; Upside: 12%

Softness in Energy vertical weighs on growth

Wipro's 2QFY16 results were in-line with our estimates on USD revenues and PAT. However, guidance for 3QFY16 remained tepid (0.5-2.5% QoQ) which took the sheen of a steady quarter. Wipro guided that higher furlough's in select verticals and slower ramp up of deals won over the recent period which is leading to a softer guidance. Management guided that 2H would remain stronger than 1H. We marginally trim our USD revenue growth estimate to 4.6% for FY16E (vs 5.6% modelled earlier). However, Wipro's USD revenue growth continues to remain softer among the Tier 1 peers (TCS/Infosys revenue growth expected at 8.8/8.8% for FY16E). Reasonable valuations (14x FY17E EPS) are a positive. Maintain BUY with TP revised marginally lower by 2% to Rs645/sh (15x September17E EPS vs 15.5x June17E EPS).

- Revenues beat marginally: Revenues at USD1,832mn were up 2.1% QoQ for 2QFY16 and marginally above our estimates (USD1,827mn). Growth in constant currency stood at 3.1% QoQ was towards the upper end of the guidance (1.5% to 3.5% QoQ growth). We note that peers Infosys/TCS/HCL Tech delivered 5.9/3.9/1.2% QoQ growth for 2QFY16. Wipro guided for 3QFY16 revenues at USD1,841-1,878mn which represents a growth of 0.5-2.5% QoQ. The revenue guidance for 3Q is below our expectations (2-3.5% QoQ growth). Wipro continues to suffer owing to its higher Energy &Utilities vertical (14.7% of total revenues) which is seeing weakness owing to falling crude prices. Revenues from this vertical declined for the fourth straight consecutive quarter and are down 9.6% YoY in USD for 2QFY16. We model 4.6% USD revenues growth for FY16E (vs 5.6% modelled earlier). This implies a 2.25% CQGR over the remaining two quarters.

- Struggles on Revenue growth despite deal wins: Wipro has been showing steady deal win announcements in FY15 which has raised hope on the street for a stronger FY16E. However, Wipro has been showing consecutive revenues miss owing to leakage in revenues in select verticals (Energy and Utilities) as well as softness in Top 10 accounts. Revenues from Top 10 accounts (19.8% of total revenues) continued to remain soft (up 0.6% QoQ and down 4.7% YoY for 2QFY16). However, select service lines appear to be showing steady traction over the past few quarters (product engineering up 4.9% QoQ and 17.2% YoY, BPO up 7.1% QoQ and 9.7% YoY).

- Strong headcount addition: Net headcount addition remained strong for the quarter which stood at 6607 employees taking the total headcount to 168,396 employees. Wipro continue on focus Digital and recent acquisition of Designit is intended to expand its offering in these areas. Management guided that while Digital would beef up the front end, it has potential to generate strong downstream revenues (5x-10x). We believe that acquisitions are the key for the technology sector as incremental spends are being driven by Digital initiatives at Enterprises.

- View: Wipro is likely to report the fourth consecutive year of single digit USD revenue growth in FY16E at 4.6% YoY growth (USD revenue growth at 5.0/6.4/7.0% for FY13/FY14/FY15). While we have been constructive on the stock owing to reasonable valuations and scope for turnaround, it has not materialized in FY16 owing to leakage in Energy vertical. Wipro currently trades at ~24% discount to TCS and risk return remains favourable.

Shares of WIPRO LTD. was last trading in BSE at Rs.568.2 as compared to the previous close of Rs. 577.9. The total number of shares traded during the day was 120643 in over 3352 trades.

The stock hit an intraday high of Rs. 577.8 and intraday low of 565.25. The net turnover during the day was Rs. 68639168.

Source : Equity Bulls

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