Wipro posts solid growth

Equity analyst Andrew Lange believes the shares are currently undervalued.
By Morningstar |  25-10-16 | 
 
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Wipro reported solid second-quarter financial results. IT services revenue was at the higher end of the firm’s revised guidance for the quarter, owing to good ongoing demand within the Americas. However, foreign exchange headwinds continued to heavily affect Wipro’s European results, and this is proving to drag on the company’s overall reported results.

Nevertheless, Wipro continues to focus its efforts on its underlying technology, people, and processes to improve its market standing and long-term relevancy. Such relevancy is indicated by recent IT service and digital deal wins across a gamut of industries.

We think Wipro remains a top-tier global IT services provider and reiterate our Rs 650 fair value estimate and narrow economic moat rating. With the stock trading in 4-star territory, we would recommend Wipro to investors seeking exposure to the Indian outsourcing and IT services market.

Wipro has announced that it has signed a definitive agreement to acquire Appirio, a cloud services company, for $500 million. With the acquisition, Wipro wants to create one of the world’s largest cloud transformation practices; this is a stark indicator of the need for strong as-a-service skills within the changing IT services market.

We think the strategy makes sense for Wipro, as it needs to rapidly build out its cloud capabilities due to the advantageous competitive position of peers such as Accenture, IBM, Capgemini, and Cognizant.

After the deal’s planned close in the quarter ending December 31, 2016, Wipro will consolidate its current cloud applications businesses of Salesforce and Workday under the Appirio brand name and business structure. Subsequently, Chris Barbin, CEO of Appirio, will lead the new cloud transformation business.

For the quarter, gross revenue rose 10% year over year to Rs 137.7 billion, while IT services revenue increased 9% year over year to Rs 131.4 billion. Global process services; communications; and healthcare, life sciences, and services were the standout practices and verticals during the quarter.

We still see particular weakness in the energy, natural resources, and utilities space due to macroeconomic factors and do not expect a notable turnaround in the near term. IT services margins were steady sequentially at 17.8%, with Wipro balancing salary increases with improvements in automation, offshoring, and better workforce utilization. We expect this margin-balancing effort to continue and think investments in automation will help to quell any significant margin deterioration over the medium term.

  • Fair Value: Rs 650
  • Uncertainty: Medium
  • Economic Moat: Narrow
  • Moat Trend: Stable
  • Stewardship: Standard

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