Wipro: Generous Uncle Sam, rupee

Its September quarter forecast is the strongest in 2 years

Wipro has underperformed the BSE IT index over the past year as its financial performance lagged peers. However, things are expected to improve and analysts say the company would deliver good performance, at least in line with the sector. Not surprisingly, the Wipro stock has done better than its peers after its results on July 26.

"We believe Wipro is on the path to achieving sector growth and the valuation of 13.7 times FY15 estimated EPS of Rs 32.5 does not appear demanding to us. With free cash flow generation as a percentage of net income (76 per cent versus 71 per cent for Infosys and 67 per cent for TCS over seven years) better than other Tier-I peers, we believe Wipro is a high-quality stock," says Nitin Padmanabhan, information technology (IT) analyst at Espirito Santo Securities.

At Rs 445, the stock trades at 15 times FY14 estimated earnings, pretty close to its five-year mean of 15.5 times, but lower than peers' valuations of 17-21 times. Given the attractive valuations, fairly toned-down expectations versus peers and, notably, expected improvement in financial performance, most analysts are positive on the stock.

The IT company has restructured its business, with a focus on improving profitability and streamlining operations. This includes the hiving off of the consumer business into a separate company, with an aim to raise focus on the IT services business. The benefits of these would be visible over the next few quarters, say analysts. Notably, the company expects its dollar revenues to grow two-four per cent in the current quarter (to between $1,620 and 1,640 million): Wipro's strongest forecast in two years. The rise in discretionary spend and improving deal wins across health care; banking, financial services and insurance; and telecom verticals are the key drivers. More, analysts say there is scope to rationalise costs and improve margins. A weaker rupee, too, helps all IT companies.

"After what has been a slow recovery, we see several positives emerging, including better-than-expected September quarter forecast, continued sales investments, improved win rates and account mining, and lower attrition. Wipro is targeting peer-level revenue growth by March 2014 at stable margins, not priced in the stock," says Abhiram Eleswarapu, IT analyst at BNP Paribas.

Wipro has been positive on demand and expects the momentum in the US (half its revenues come from there) to sustain. Its focus on select business verticals and continued investment in sales and marketing has boosted deal wins. The pipeline, too, has improved meaningfully and Wipro is seeing strong traction in some areas of Europe. Analysts say a sustained trend should help the company enhance growth rates.

On the other hand, there are a few margin levers that could push up Ebitda margins. While most analysts say the company will reinvest a large part of the gains from a weaker rupee to drive growth, lower utilisations (73 per cent versus 75-83 per cent for peers) also indicate more room to raise revenues without a proportionate rise in staff costs (takes up half the revenues).

"Wipro's per employee EBIT is 28-30 per cent below its peers', due to an inefficient cost structure relative to its revenue mix, which can improve", says Abhiram.

After the results, Wipro had said it was expecting cost efficiencies to improve. For the current quarter, though, some expected gains from a weak rupee and cost-control measures may get offset by wage rises taken from June 1.

India and West Asia business (nine per cent of revenues) is seeing good traction. The company plans to step up investments and foray into new markets. Durga Prasad, vice-president and business head of India and West Asia, says, "Oil & gas, telecom, banking, government and education are some of the verticals performing well in West Asia. Africa is one of our growth markets where we plan to raise investments. To strengthen our presence in West Asia, we will expand our footprint in newer territories such as Qatar, Oman and Kuwait." On the whole, while there are signs of improvement in the prospects, any deterioration in demand may offset the expected gains for Wipro, as well as the industry.