Growth in key verticals and European business is positive for the software major

Even as market makes a dash for cyclicals, resulting in sharp run-up in stock prices and valuations, there are concerns over the Iraq crisis, poor monsoon and what the Union Budget might hold. Against this background, stocks with a defensive tilt, available at reasonable valuations, may be a good option.

Wipro is one such large software player that can be considered by investors with a two-year horizon. On the revenue growth front, it has steadily caught up with the other top-tier players in the past three quarters. The management commentary, too, is increasingly bullish for the future.

Investors can buy this stock for its attractive valuation compared to its peers.

At ₹547, the stock trades at 15 times its likely FY15 per share earnings. This makes it much cheaper than Infosys, TCS, and HCL Technologies that trade at 16-20 times.

In 2013-14, Wipro’s revenues grew 16 per cent over the previous fiscal at ₹43,755 crore, while net profit rose 17.5 per cent to ₹7,797 crore. Growth in key verticals as well as service lines, new business from Europe and large deal wins ensured adequately satisfying performance.

An increase in fixed price contracts, ramp-up in revenues from top clients and scope to improve utilisation can help sustain Wipro’s operating margins at 23 per cent levels.

Mining clients well

Larger business verticals such as finance solutions, healthcare and energy have been engines of growth for Wipro. High-margin offerings such as business application services, product engineering and analytics have all contributed more to revenues over the past four quarters, indicating the company’s ability to tap discretionary spends of clients.

In terms of geographies, European business has been strong with nearly 30 per cent of its revenues coming from the region.

As recovery in this region accelerates, Wipro should gain. In the last one year, the company has managed to increase its tally of $50-million clients by three to 29, while 16 customers were totally added in the $10- and $20-million buckets.

It has been able to mine its top customers well, with top 10 clients growing faster than the overall company’s rate. The company used rupee weakness to invest in a larger sales team. From client additions and ramp-up in its top customers, the move seems to have paid off.

Fixed-price contracts which are more profitable than time and material projects now bring in 49.4 per cent of the company’s revenues, the proportion increasing by three percentage points over the past one year. Utilisation, at 74 per cent, offers scope for the company to increase productivity. Expectations are for utilisation to move to 80 per cent levels, in line with top-tier peers.

With the new government promising to increase e-governance initiatives, Wipro, which is a key player domestically as it works with many State agencies, might benefit from increased technology spends from the segment. The company derives nearly 9 per cent of its revenues from its India and Middle-East division. Domestic deals had slowed on concerns over payment delays and slow decision making, which is likely to change with a new dispensation in place at the Centre.

(This article was published on July 6, 2014)
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