New deal wins boost Wipro's prospects

Dollar revenue growth this financial year is likely to be better than in the past two; analysts believe it could match industry revenue growth in FY16

Wipro's scrip has underperformed both the S&P BSE Sensex and peers Tata Consultancy Services (TCS), Infosys and HCL Technologies over the past six months. Partly due to its lagging sectoral growth in recent quarters. However, that could change. Wipro's restructuring efforts appear to be paying. There is improved momentum in deal wins and pipeline across high growth segments such as infrastructure management services (IMS), energy and utilities, and health care.

The company bagged two large multi-year deals in September, one in the IMS space with Philip Morris International and the second with Saudi Electricity Company. This year, Wipro bagged a $1.1-billion deal with ATCO (opens the under-penetrated markets of Canada and Australia's energy and utilities vertical) and another $400 million deal with Takeda Pharma.

However, revenue from existing top clients is under pressure due to client-specific project completion. The management, however, expects growth in the 10 client revenues to improve from the December quarter, as new projects of these customers take off. But, to meet sectoral growth, it needs healthy rises in both new and existing client businesses. Analysts believe dollar revenue will grow 10 per cent or above this financial year, after single-digit growth in FY13 (five per cent) and FY14 (6.4 per cent), and will match sectoral revenue growth in FY16. For the ongoing quarter, the management expects two to four per cent sequential growth in dollar revenue, which the company is likely to achieve, believe analysts. IMS, health care, energy & utilities and BFSI (banking, financial services and insurance) are likely to drive top line growth.

Apart from stronger focus on deals, Wipro continues to drive cost efficiencies and employee productivity. With these measures, likely forex gains and post spin-off of the hardware business, analysts expect its Ebitda (earning before interest, taxes, depreciation and amortisation) margin to rise from 22.4 per cent in FY14 to 23-24 per cent over the next two years.

A majority of analysts are bullish on the stock. Of the 14 polled by Bloomberg this month, nine have a 'Buy' and the rest a 'Hold' recommendation. Their average target price is Rs 614, five per cent higher from the current levels. Valuations of 14 times the FY16 estimated earnings are inexpensive and closer to its average one-year forward PE ratio of 15 times.

The stock, though, trades at a significant discount to peers such as TCS (of 24.4 per cent) and Infosys (8.8 per cent) currently. While TCS' premium valuations are likely to continue, Wipro might manage to reduce some discount if there is strong and sustained momentum in revenue growth.