Hold Wipro Ltd For Target Rs. 450 - Emkay Global
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In-line operating performance; deal intake and Q1 guidance surprise positively
* Wipro reported in-line operating performance in Q4. IT Services revenue grew 3.9% QoQ to USD2.15bn (3.0% CC). IT services EBITM remained resilient despite salary hikes, down 70bps QoQ at 21% (in line with our estimates, 60bps higher than consensus).
* Wipro guided for 2-4% QoQ growth in IT Services revenue in Q1. The guidance does not include revenue from Capco and Ampion. It expects that salary hike for the remaining 20% employees (wef Jun’21) and investments in front-end sales may weigh on margins in Q1.
* Wipro signed 12 large deals with combined TCV of USD1.4bn in Q4. Management indicated that overall deal signing was worth USD7.1bn in H2FY21 (including large deal TCV of USD2.6bn), which offers good revenue growth visibility in coming quarters.
* We tweaked FY22E EPS by -1%, factoring in Q4 performance, Ampion acquisition and robust deal signings. Simplified operating model, leadership augmentation and Capco acquisition show Wipro’s growth aspiration and its resolve to take big bets. We like some of these steps; however, tangible results hinge on strong execution. Considering poor execution track record, we prefer to wait for clear signs of improvement in operating metrics. We maintain Hold with a TP of Rs450 at 20x FY23E earnings.
What we liked?
Broad-based revenue growth, better-than-expected guidance for Q1 and healthy deal intake (USD1.4bn)
What we did not like?
Voluntary TTM attrition rate inched up to 12.1% vs. 11.0% QoQ.
Broad-based revenue growth performance: Revenues grew 3.9% QoQ to USD2.15bn (CC 3%) in Q4, continuing the momentum seen in Q3. Revenue growth was broad based, led by Technology (9.9% QoQ CC), Consumer (6.9%), ENU (2.7%) and BFSI (2.7%). From strategic market units perspective, growth was led by Americas 2 (4.0%), Europe (3.7%) and Americas 1 (3.5%). Wipro continues to see good demand in the areas of digital transformation, cloud, data analytics and cyber security. Wipro has closed 12 large deals with large deal TCV of USD1.4bn in Q4 (vs. USD1.2bn in Q3). Management indicated that overall deal signing was USD7.1bn in H2FY21 (including large deals TCV of USD2.6bn), which augurs well for growth momentum going into FY22.
EBITM declined 70bps QoQ: IT Services EBITM declined by 70bps to 21.0% due to salary hikes (covered ~80% of employees), partly negated by revenue acceleration, offshore shift (up 60bps QoQ), and other operating efficiencies. It expects the second round of salary hikes (for balance employees wef Jun’21), skill-based bonus, promotions, and investments in frontsales to weigh on margins. However, revenue acceleration and strong operational rigor (utilization, offshoring, employee pyramid, etc.) would support margins. Wipro has refrained from giving details on next salary hike. Management said that the medium-term sustainable EBITM range would be close to 19.0-19.2%, excluding the dilutive impact of acquisitions
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