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Wipro: Starts FY16 as per expectations - Views on News from Equitymaster
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Wipro: Starts FY16 as per expectations
Jul 27, 2015

Wipro has announced its results for the first quarter for FY16. The company has reported a 1.6% QoQ increase in sales and a 3.7% QoQ decrease in net profits. Here is our analysis of the results.

Performance summary
  • Consolidated net sales increased by 1.6% QoQ during the quarter. IT services revenues were up 0.2% QoQ in constant currency terms and 1.1% QoQ in US dollar terms.
  • The operating margin was down sequentially at 22.1% in 1QFY16 compared to 22.9% seen in 4QFY15. On an absolute basis, the operating profit decreased by 1.6% QoQ in the quarter largely due to the impact of wage hikes given in the quarter.
  • The net profit decreased 3.7% QoQ largely due to the muted sequential operating performance as well as a 4.3% QoQ fall in other income.

Consolidated financial performance
(Rs m) 4QFY15 1QFY16 Change
Gross revenues 121,714 123,706 1.6%
Expenditure 93,891 96,317 2.6%
Operating profit 27,823 27,389 -1.6%
Operating profit margin (%) 22.9% 22.1%  
Other income 5,476 5,242 -4.3%
Finance expenses 912 1,286 41.0%
Depreciation 3,267 3,367 3.1%
Profit before tax 29,120 27,978 -3.9%
Tax 6,255 5,945 -5.0%
Profit after tax 22,865 22,033 -3.6%
Minority interest 145 156 7.6%
Net profit 22,720 21,877 -3.7%
Net profit margin (%) 18.7% 17.7%  
No. of shares (m)   2,469.3  
Diluted earnings per share (Rs)*   35.4  
P/E ratio (x)*   15.9  
* On a trailing 12-months basis

What has driven performance in 1QFY16?
  • In terms of verticals, service lines and geographies Wipro had a mixed quarter. The company has re-organised the reporting of revenues from various service lines to better reflect the realities of the business. Therefore there is significant overlap in revenues due to various digital services. The US led the growth in the quarter. Revenues from Europe were down sequentially due to weakness in the energy and telecom verticals. The product engineering division continues to witness good momentum.

    Business mix
    Revenue breakup for IT services (Rs m) 4QFY15 1QFY16 Change
    Based on geography
    US 62,926 64,946 3.2%
    Europe 32,011 31,669 -1.1%
    India and Middle East 13,023 13,113 0.7%
    Rest of the world 13,754 13,979 1.6%
    Based on service offerings
    Wipro Analytics 8,642 9,278 7.4%
    Global Infrastructure Services 33,958 34,638 2.0%
    Application Services 58,423 58,760 0.6%
    Product Engineering 9,250 9,525 3.0%
    R&D 12,415 12,742 2.6%
    BPO 11,441 11,505 0.6%
    Consulting 2,191 2,103 -4.0%
    Based on verticals
    Global Media & Telecom 16,431 16,329 -0.6%
    Finance Solutions 32,254 33,153 2.8%
    Manufacturing & Hi-tech 22,274 23,009 3.3%
    Healthcare, Life Sciences & Services 14,241 13,855 -2.7%
    Retail, Consumer goods & Transportation 17,649 18,556 5.1%
    Energy and Utilities 18,866 18,803 -0.3%

  • At the operating level, the margins were down sequentially due to wage hikes. The company has given a salary increase of 7% offshore and 2% onsite. The management maintained that margins would remain tight range (excluding the cross currency impact) and that the operating performance would pick up from 2QFY16 onwards.

  • At the net level, a operating profit and lower other income (both on a sequential basis) impacted the bottomline which fell by 3.7% QoQ.
What to expect?
At the current price of Rs 561, the stock is trading at a multiple of 15.9 times its trailing 12 month earnings.

Wipro's performance in 1QFY16 was in line with expectations. In constant currency terms, the IT services revenue grew by 0.2% QoQ. The IT products revenue came in at Rs 8.2 bn up 7% YoY. The deal pipeline for the company remains healthy. However, pricing pressure in traditional IT services is ever present. This will continue to impact gross margins and the company is looking to counter it with a wide variety of measures that we are aware of. We continue to tract these closely. On the SG&A front we have no concerns as the management has sufficient head room to optimize costs on this front going forward.

The management re-iterated that the client specific issues in the Energy and BFSI verticals will get resolved over the next one-two quarters. Thus growth can be expected to pick up from 2QFY16 onwards. The management also stated that 2HFY16 will be significantly better that 2HFY15. Also, the management expects the energy vertical to turn around in 2QFY16 and the worst seems to be over in terms of client orders getting re-negotiated/postponed.

The company's digital business continues to witness traction. Wipro's investments in this area are beginning to bear fruit. However, this road will be a long one we believe. The company's VC arm is continuously scouting for possible takeover opportunities. Wipro has recently acquired Designit, a globally renowned strategic design firm based in Denmark for a consideration of around US$ 95 m. This acquisition will certainly help the company bolster its design capabilities in the digital space.

We have updated our FY18 financial estimates for Wipro. Our revised target price for FY18 is Rs 842. At current levels, the stock does not factor in the positive long term fundamental upside. Thus, we re-iterate our buy view on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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