Wipro Ltd (Wipro) 567

Transcription

1 Result Update Rating matrix Rating : Buy Target : 680 Target Period : 12 months Potential Upside : 20% What s Changed? Target EPS FY16E EPS FY17E Rating Unchanged Unchanged Unchanged Unchanged Quarterly Performance FY16 FY15 YoY (%) FY16 QoQ (%) Revenue 12,567 11, , EBIT 2,408 2, , EBIT (%) bps bps PAT 2,235 2, , Key Financials Crore FY14 FY15E FY16E FY17E Net Sales 43,763 47,318 50,886 55,210 EBITDA 10,046 10,825 11,713 12,807 Net Profit 7,797 8,653 9,134 9,982 EPS ( ) Valuation summary FY14 FY15E FY16E FY17E P/E Target P/E EV / EBITDA P/BV RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization ( Crore) 139,271.4 Total Debt (Sept-15) ( Crore) 9,931.1 Cash and Investments (Sept-15) ( Crore) 22,687.6 EV ( Crore) 126, week H/L 678 / 513 Equity capital Face value 2 Price performance (%) 1M 3M 6M 12M TCS (3.4) 0.2 (0.3) 6.8 Infosys Wipro (3.7) 5.5 HCL Tech (0.5) Research Analysts Abhishek Shindadkar abhishek.shindadkar@icicisecurities.com Middling October 23, 2015 Wipro Ltd (Wipro) 567 IT services constant currency (CC) revenues grew 3.1% QoQ (1.5 to 3.5% guidance) while dollar revenues grew 2.1% QoQ to $1,831.9 million (2% QoQ, $1,830 million estimate) IT services EBIT margins declined 25 bps QoQ to 20.7%, in line with our estimate Reported PAT of 2,235 crore was modestly above our 2,160 crore estimate led by higher other income Wipro gave Q3FY16E revenue growth guidance of $1,841 million to $1,878 million (0.5 to 2.5% QoQ growth) In line quarter The management commentary on the demand environment continues to be encouraging driven by receding headwinds in key verticals (energy, natural resources, telecom & healthcare) and likely recovery in top accounts that have been laggards. From a quarterly perspective, Wipro delivered 3.1% constant currency revenue growth (1.5 to 3.5% guidance) led by broad-based across verticals (key verticals telecom, finance solutions, manufacturing, retail, consumer goods, transportation and healthcare grew above company average). Americas (3.6%), India and Middle East (2.7%), APAC (5.1%) led across geographies while Europe rebounded (1.4% vs. -5.3% decline in ). Continued decline in top customer revenues was noteworthy against anticipated recovery in. Wipro guided for % constant currency revenue growth in Q3FY16E led by deal ramp-ups in momentum verticals, and expected growth in top clients. We maintain our 5.5% FY16E $ revenue growth estimate given company reiterated its H2 better than H1 commentary. Wage hikes, utilisation impact margins in At 20.7%, IT services EBIT margins declined 25 bps QoQ, in line with our 20.8% estimate led by two month wage hike impact, cross-currency and lower utilisation partially offset by the rupee, productivity gains driven by internal initiatives. Consolidated EBIT margins declined 10 bps QoQ to 19.3%. We expect FY16E IT services EBIT margins to decline 40 bps YoY to 21.7% primarily led by investments and slower revenue growth. Client metric stable but could have been better Clients contributing $50-75 million increased by one QoQ to 14 while >$100 million continues to be stagnant at 10 since Q3FY13 (barring Q3FY14 and Q4FY15, which saw addition of one client) and captures the weakness in top 10 customers during the same period ($362.7 million in FY16 vs. $353.3 million in Q3FY13). Sequentially, clients contributing >$1 million declined by four, while those contributing $ million, $20-50 million, $10-20 million and $5-10 million in revenues on an LTM basis was flat, declined by two, increased by four, and declined by three, respectively. Customers in $3-5 million category increased by seven while those in $1-3 million declined by 11. Modest valuations continue to dictate BUY We estimate Wipro will report slower revenue and PAT CAGR of 8% and 7% during FY15-17E (average 21.8% IT services EBIT margins in FY16-17E), vs. 12%, 14%, reported in FY10-15 (average 22.1% margins), respectively, led by weak client mining and softness in energy vertical (~15% of revenues). We continue to value the stock at 16.8x FY17E EPS of 40.5 to arrive at our 680 target price and maintain our BUY rating. ICICI Securities Ltd Retail Equity Research

2 Variance analysis FY16 FY16E FY15 YoY (%) FY16 QoQ (%) Comments Revenue 12, , , , Consolidated revenues grew 1.6% QoQ led by 4% growth in IT services business, but were marginally below our 3.3% growth estimate Employee expenses 8, , , , Gross Margin 4, , , , Gross margin (%) bps bps Selling & marketing costs G&A expenses EBITDA 2, , , , EBITDA Margin (%) bps bps Depreciation EBIT 2, , , , EBIT Margin (%) bps bps Two month wage hike impact, cross-currency and lower utilisation were margin headwinds while rupee, productivity were tailwinds Other income PBT 2, , , , Tax paid Reported PAT modestly higher led by higher other income PAT 2, , , , Key Metrics Closing employees 168, , , , Headcount grew by 6607 QoQ TTM voluntary Attrition (%) bps bps LTM attrition was flat sequentially Utilisation ex support (%) bps bps Utilisation declined 220 bps QoQ. However, ex-trainees increased 40 bps Average $/ Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Revenue 50,886 50, ,210 55, FY16E growth could be modest and likely lower than peers EBITDA 11,713 11, ,807 12, EBITDA Margin (%) bps bps Wage hikes, promotions, visa and investments could hurt margins PAT 9,134 9, ,982 9, EPS ( ) Assumptions Current Earlier FY14 FY15 FY16E FY17E FY16E FY17E Closing employees 146, , , , , ,917 TTM voluntary Attrition (% Utilisation ex support (%) Average $/ ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Generally in-line quarter In line FY16 earnings and soft Q3FY16E guidance (0.5% to 2.5% QoQ growth, $1,841 million to $1,878 million) imply FY16E growth could range high single digits. However, management commentary on the demand environment continues to be encouraging driven by receding headwinds in key verticals (energy, natural resources, telecom and healthcare) and recovery in top accounts, which have been laggards. From a quarterly perspective, Wipro delivered 3.1% constant currency revenue growth (1.5 to 3.5% guidance) led by broad based across verticals key verticals telecom (4.4%), finance solutions (3.1%), manufacturing (3.6%), retail, consumer goods and transportation (3.5%) and healthcare (4.2%) grew above company average. Americas (3.6%), India and Middle East (2.7%), APAC (5.1%) led across geographies while Europe rebounded (1.4% vs. -5.3% decline in ). Within service lines, IMS (1.8% QoQ growth in reported currency), Wipro analytics (3.3%), BPO (7.1%), product engineering (4.9%), R&D business (4.1%) and consulting (13.8%) led while application services (0.7%) continues to be weak. Exhibit 1: Dollar revenues may grow at 7.2% CAGR during FY15-17E $ million % FY10 FY11 FY12 FY13 FY14 Q3 Q4 FY15 FY16E FY17E Dollar revenue Growth, YoY Exhibit 2: Wipro growth vs. Nasscom guidance may lag Nasscom growth in FY16E % FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E Growth, YoY NASSCOM guidance ICICI Securities Ltd Retail Equity Research Page 3

4 Client metric stable but could have been better Clients contributing $50-75 million increased by one QoQ to 14 while >$100 million continues to be stagnant at 10 since Q3FY13 (barring Q3FY14 and Q4FY15 that saw addition of one client) and captures the weakness in top 10 customers during the same period ($362.7 million in FY16 vs. $353.3 million in Q3FY13). Sequentially, clients contributing >$1 million declined by four, while those contributing $ million, $20-50 million, $10-20 million and $5-10 million in revenues on an LTM basis was flat, declined by two, increased by four, and declined by three, respectively. Customers in $3-5 million category increased by seven while those in $1-3 million declined by 11. Recall, Wipro added 113 customers to the $1 million bucket since FY11 while improving win rates led to addition of 194 new accounts in FY15 vs. average 163 in FY Mining was also flat QoQ as revenue/client metric was at $1.67 million in vs. $1.68 million in and $1.68 million in Q4 but is still higher than its () FY10-15 average of $1.63 million. Exhibit 3: Sequentially, clients contributing >$1 million in revenues declined by x FY10 FY11 FY12 FY13 FY14 $1 million+ clients Q3 Q4 FY15 Wage hikes, utilisation impact margins in At 20.7%, IT services EBIT margins declined 25 bps QoQ, in line with our 20.8% estimate led by two month wage hike impact, cross-currency and lower utilisation partially offset by the rupee, productivity gains driven by internal initiatives. Consolidated EBIT margins declined 10 bps QoQ to 19.3%. FY16 IT services margin profile of 20.7% is lower than its () FY10-15 average of 21.5% primarily led by higher business investments, higher onsite mix (53.9% vs. average 53.4%) and slower revenue growth partially offset by rupee and utilisation (77.2% vs. average 75.8%). We expect FY16E IT services EBIT margins to decline 40 bps YoY to 21.7% primarily led by investments and slower revenue growth. ICICI Securities Ltd Retail Equity Research Page 4

5 Exhibit 4: IT services margins decline 25 bps QoQ and were in line with our estimate % FY10 FY11 FY12 FY13 FY14 Q3 Q4 EBIT margin (IT services) FY15 FY16E FY17E [ Sequential decline in utilisation could be worrying Utilisation (ex-support) declined 140 bps QoQ to 77.2 vs. 79.4% in. Noticeably, utilisation is now down 30 bps YoY despite an increase of 350 bps in H1CY15. At 16.4%, LTM voluntary attrition was flat sequentially while quarterly annualised attrition jumped 40 bps QoQ to 16.8% vs. 16.4% in likely due to seasonality. Exhibit 5: At 16.4%, though attrition was stable QoQ, it is highest since FY13 (15.6%) % FY10 FY11 FY12 FY13 FY14 Q3 Q4 FY15 FY16E FY17E TTM voluntary Attrition Exhibit 6: Sequential decline in utilisation may be worrying 85 % FY10 FY11 FY12 FY13 FY14 Q3 Q4 Utilisation ex support (%) FY15 FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 5

6 Outlook and valuation Wipro delivered in line FY16 quarterly earnings while guidance was okay. Constant currency revenue growth was broad based across verticals (key verticals telecom, finance solutions, manufacturing, retail, consumer goods and transportation and healthcare grew above company average) while Americas, India, APAC, BPO, analytics, product engineering, R&D and consulting were notable growth drivers. Wipro expects recovery to accelerate in H2FY16E and has guided for % constant currency revenue growth in Q3FY16E led by deal ramp-ups and expected growth in top clients. We estimate Wipro will report slower revenue and PAT CAGR of 8% and 7% during FY15-17E (average 21.8% IT services EBIT margins in FY16-17E), vs. 12%, 14%, reported in FY10-15 (average 22.1% margins), respectively, led by weak client mining and softness in energy vertical (~15% of revenues). We continue to value the stock at 16.8x FY17E EPS of 40.5 to arrive at our 680 target price and maintain our BUY rating. Exhibit 7: One year forward rolling PE Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Price Exhibit 8: Valuation Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY14 43, FY15E 47, FY16E 50, FY17E 55, ICICI Securities Ltd Retail Equity Research Page 6

7 Company snapshot Target price : Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Jun-11 Acquires the commercial business services business unit of Science Applications International Corporation (SAIC) Nov-12 Approves demerger of consumer care, infrastructure engineering and medical business into a separate unlisted company, Wipro Enterprises Dec-12 Announces acquisition of LD Waxsons group with skincare brands Bio-essence and Ginvera for $ 144 million. Apr-13 Demerges Wipro Enterprises and Wipro IT business; possible dilution of shareholder stake expected May-13 Acquires minority stake in Opera Solutions, an enterprise software service provider, for $30 million Jul-13 Reports higher-than-expected dollar revenue guidance for FY14 Dec-13 Announces acquisition of Opus Capital Markets Consultants, a mortgage due diligence and risk management services provider, for $75 million. Apr-14 Delivers yet another below-industry average dollar revenue growth for FY14 and guides for 0-2% growth for FY15E Jul-14 Signs 10-year, $1.2 billion outsourcing deal with ATCO, a Canada-based utilities firm. Wipro to also acquire ATCO's subsidiary, I-Tek for $195 million Jul-14 Reports in line quarter (1.2% dollar revenue growth) but below industry average. Guides for 0.7-4% growth during FY15E Jan-15 Signs multi-year, $400 million deal with Swiss engineering company, ABB for application maintenance and infrastructure services as per media sources Apr-15 Delivers mixed set of Q4FY15 earnings. Revenue growth was below our estimates while margins surprised positively Jul-15 Delivers steady FY16. Constant currency revenues were in line with estimates while dollar revenues were higher led by a favourable cross currency Oct-15 Reports in line FY16 quarter while guidance was okay. IT services $ revenues grew 2.1% QoQ to $1,831.9 million, inline our growth estimate Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Premji (Azim Hasham) 30-Jun , Azim Premji Trust 30-Jun Life Insurance Corporation of India 30-Jun ICICI Prudential Asset Management Co. Ltd. 31-Aug BlackRock Institutional Trust Company, N.A. 30-Sep HSBC Global Asset Management (Hong Kong) Limited 31-Aug APG Asset Management 31-Mar Azim Premji Foundation (India) Pvt. Ltd. 30-Jun The Vanguard Group, Inc. 30-Sep HDFC Asset Management Co., Ltd. 31-Aug Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Mar-14 Jun-14 Sep-14 Jun-15 Sep-15 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Life Insurance Corporation of India 45.65m 4.87m Norges Bank Investment Management (NBIM) m -5.01m APG Asset Management 41.89m 4.52m Schroder Investment Management (Hong Kong) Ltd m -2.87m Nordea Funds Oy 11.91m 1.39m Franklin Advisers, Inc m -1.70m PGGM Vermogensbeheer B.V m 1.21m Principal Global Investors (Equity) m -1.39m BlackRock Asset Management North Asia Limited 10.62m 1.20m BlackRock Institutional Trust Company, N.A m -1.13m S R t ICICIdi t R h ICICI Securities Ltd Retail Equity Research Page 7

8 Financial summary Profit and loss statement Crore FY14 FY15E FY16E FY17E Total Revenues 43,763 47,318 50,886 55,210 Growth (%) COGS 29,549 32,128 34,495 37,370 Other Expenditure 4,168 1,760 4,678 5,033 EBITDA 10,046 10,825 11,713 12,807 Growth (%) Depreciation 1,111 1,282 1,374 1,491 Other Income 1,454 1,986 2,065 2,080 Exchange difference F.income (289) (360) (470) (355) Pft. from associates PBT 10,100 11,168 11,934 13,041 Growth (%) Tax 2,260 2,462 2,745 2,999 PAT before Minority int, 7,840 8,706 9,189 10,042 Minority int PAT 7,797 8,653 9,134 9,982 Growth (%) EPS EPS (Growth %) Cash flow statement Crore FY14 FY15E FY16E FY17E PAT before minority int. 7,840 8,706 9,189 10,042 Depreciation 1,111 1,282 1,374 1,491 (inc)/dec in Current Assets (2,358) (1,523) (1,325) (1,922) (inc)/dec in current Liabilities 1, Taxes paid (2,177) (2,427) (2,745) (2,999) CF from operations 6,789 7,826 8,031 8,328 Other Investments 505 (1,454) 2,065 2,080 (Purchase)/Sale of Fixed Assets (782) (1,127) (1,400) (1,600) CF from investing Activities (277) (2,582) Inc / (Dec) in Equity Capital Inc / (Dec) in sec.loan Funds (1,077) 2,088 (1,000) (1,000) Dividend & Divendend tax (2,421) (3,041) (4,092) (4,411) CF from Financial Activities (3,497) (852) (5,092) (5,411) Exchange rate differences (7) Opening cash balance 8,412 11,420 15,894 19,498 Closing cash 11,420 15,871 19,498 22,894 Balance sheet Crore FY14 FY15E FY16E FY17E Equity Reserves & Surplus 33,857 40,305 45,817 51,742 Networth 34,350 40,798 46,310 52,236 Minority Interest Debt - long term 1,091 1,271 1,271 1,271 Debt - short term 4,068 6,621 5,621 4,621 Non-current liabilities 1,005 1,367 1,367 1,367 Trade payables 5,226 5,875 6,033 6,253 Current liabilities & provisions 4,352 3,908 4,136 4,359 Source of funds 50,230 60,003 64,958 70,385 Goodwill 6,342 6,808 6,808 6,808 Intangible Assets PPE 5,145 5,421 5,445 5,547 O.non current assets 2,814 2,946 2,946 2,946 Investments Debtors 8,539 9,153 9,807 10,764 Cash & Cash equivalents 11,420 15,894 19,498 22,894 Investments - short term 6,422 5,899 5,899 5,899 O.current assets 9,088 12,704 13,374 14,339 Application of funds 50,230 60,003 64,958 70,385. Key ratios (Year-end March) FY14 FY15E FY16E FY17E Per share data ( ) EPS Cash EPS BV DPS Operating Ratios (%) EBIT Margin PBT Margin PAT Margin Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 8

9 ICICIdirect.com coverage universe (IT) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Cyient (INFENT) Hold 6, Eclerx (ECLSER) 1,832 1,500 Sell 5, Firstsource (FIRSOU) Buy 2, HCL Tech* (HCLTEC) 853 1,050 Buy 119, Infosys (INFTEC) 1,150 1,300 Buy 264, KPIT Tech (KPISYS) Hold 2, Mindtree (MINCON) 1,490 1,450 Buy 12, NIIT Technologies (NIITEC) Hold 3, Persistent (PSYS) Hold 5, TCS (TCS) 2,537 2,800 Buy 499, Tech Mahindra (TECMAH) Buy 51, Wipro (WIPRO) Buy 140, * June year end, ICICI Securities Ltd Retail Equity Research Page 9

10 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 10

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