Wipro - 4QFY20 Review - Uncertainty persists - HDFC Securities

We maintain REDUCE rating on Wipro based on lower than expected revenue and margin performance. Covid-19 related global slowdown will lead to cut in discretionary spending, pricing discounts and postponement of large deals wins. Headwinds in BFSI (Medium term), stress in Manufacturing (Auto) and ENU (Energy) will offset the improving outlook in Healthcare and Communication. The company has not provided for 1QFY21E guidance, citing uncertainty. We cut our EPS estimates by 0.9/1.5% for FY21/22E. Our TP of Rs 185 is based on 11x FY22 EPS.

Revenue in 4Q stood at USD 2,074mn, +0.4/2.6% QoQ/YoY CC (vs. est. of USD 2,086mn). Growth in 4Q was supported by uptick in ENU (12.8% of rev), Healthcare (13.5% of rev) and Technology (12.8% of rev), while Consumer vertical (16.8% of rev) declined due to Covid impact. BFSI (30.4% of rev) growth decelerated to -1.3% YoY (vs 15.9% YoY CC in 4QFY19), impacted by slowdown in large European banks, Capital market subsegment and Covid-19 impact.

Growth slowed down in NorthAm (+3.1% YoY CC) while Europe growth was soft (+1.9% YoY CC). Wipro has not given guidance for 1Q due to global uncertainty. The impact of Covid-19 in the quarter was ~USD 14-16mn (3 weeks), which is 0.7-0.8% of revenue. USD rev growth adjusting for Covid comes to +1.2% CC, which is at the midpoint of the guidance (0-2% CC).

IT services margin contracted 76bps QoQ to 17.6% (est. 18.1%). Margin was impacted due to lower growth and higher salary payout, offset by higher utilisation, lower SG&A and currency benefit. APAT came at Rs 24.56bn, -5.3% QoQ impacted by higher ETR of 20.9% (vs. 20.0% in 3Q).

Cash conversion was impacted in the quarter due to increase in working capital related to Covid-19. OCF to PAT conversion was at 60.5% in 4Q vs. ~100% last quarter. Net cash stands at USD 3.3bn (~22% of Mcap).

Valuation and view: Wipro's growth will continue to lag within the Tier-1 IT pack based on soft outlook for ~51% of rev comprising BFSI, Retail, Travel, Manufacturing & Energy. This will be offset by relatively better outlook in Consumer (e-commerce & new age Media), Healthcare (Hospitals) and Communication. New opportunity will emerge with increased cloud adoption, Automation and workplace modernisation. Clients are looking for higher efficiencies (RTB) and vendor consolidation (benefit for incumbents). While growth concerns remain (Covid led disruption), there is limited scope for margin expansion. We expect USD rev growth of -4.4/+4.7% and IT services EBIT% at 17.0/17.3% for FY21/22E. The stock is down ~25% in 3M and valuations are at ~11.9x FY21E (vs. 12.8x Tier1 IT median).

Shares of WIPRO LTD. was last trading in BSE at Rs.186.55 as compared to the previous close of Rs. 189.45. The total number of shares traded during the day was 412252 in over 6098 trades.

The stock hit an intraday high of Rs. 193.5 and intraday low of 186. The net turnover during the day was Rs. 78129918.

Source : Equity Bulls

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