Wipro meets top-line expectation

Analyst Andrew Lange believes that the shares offer a good entry point.
By Morningstar Analysts |  20-07-16 | 

Wipro reported an in-line first-quarter result, with IT services revenue within management’s guidance and our expectations.

The company was keen to stress its growing digital (social, mobile, analytics, cloud) capabilities with Wipro Digital and Wipro Holmes (an artificial intelligence platform).

The company had a number of client wins during the quarter related to these newer services, but the preponderance of the firm’s revenue pertains to more efficiency-type services. To that end, we think Wipro will have to continue to invest in these newer digital-related initiatives to remain a leading IT-services vendor, which will be a multiyear endeavor.

Still, we think the firm is well entrenched with its clients and believe its greater emphasis on digital and localized client-facing resources should help it make the services transition.

We retain our Rs 650 fair value estimate and narrow economic moat rating. We think the Indian-listed shares offer investors and attractive entry point for investment, although the firm’s unjustifiable premium on the U.S.-listed shares warrants a wider margin of safety.

For the quarter, gross revenue increased 11% year over year to Rs 136 billion, while IT-services revenue grew 13% to Rs 131 billion.

By vertical, the healthcare, life sciences and services business was the strongest as a result of the consolidation of HealthPlan Services.

Meanwhile, the energy, natural resources and utilities business was the weakest as macroeconomic issues continued to weigh on the sector.

Management noted that Britain's vote to leave the European Union had not affected the business so far and that the company did not expect a significant effect on sales over the year.

The firm’s IT-services operating margin of 17.8% was notably lower year over year (down 290 basis points) and sequentially (down 190 basis points) owing to employee compensation increases and acquisition-related impacts (particularly from Wipro’s acquisition of HealthPlan Services for $460 million).

The compensation increases are to be expected given the industry’s seasonality surrounding this issue, but we will continue to monitor the integration of HealthPlan and Wipro’s ability to leverage synergies out of the deal. We continue to forecast midterm operating margins around 20%.

  • Fair Value: Rs 650
  • Consider Buy: Rs 455
  • Consider Sell: Rs 877.50
  • Uncertainty: Medium
  • Economic Moat: Narrow
  • Moat Trend: Stable
  • Stewardship: Standard
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