Wipro: Buy

Wipro has been the last of the Big Four in Indian software to stage a comeback. But it now looks set to regain lost ground with good revenue growth in the last three successive quarters and the management’s bullish commentary for the future.

Investors can buy the shares of the company in light of its attractive valuation compared to peers.

At ₹573, the stock trades at 16 times its likely FY15 per share earnings. This makes it much cheaper than Infosys and TCS, that trade at 18-20 times forward earnings.

In the first nine months of 2013-14, Wipro’s revenues grew 14.2 per cent to ₹31,773 crore, while net profits rose 13.5 per cent to ₹5,570 crore. Growth in key verticals as well as service lines, new business from Europe and large deal wins drove the 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 23-25 per cent levels.

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, a good sign for the future.

These trends suggest that the company has been able to tap into discretionary spends of clients.

In terms of geographies, European business has been pretty strong and 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 $100 million clients to 11, while 13 customers were added in the $10-50 million bucket.

It has been able to mine its top customers well, with top 10 clients growing faster than the average run 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 50.6 per cent of the company’s revenues, the proportion increasing by four percentage points over the past one year.

Utilisation, at 74 per cent, offers scope for the company to milk productivity increases, especially if it moves up to 80 per cent levels, in line with top-tier peers.