Stock Fundamentals

Wipro: Getting IT’s act together

K Venkatasubramanian | Updated on January 24, 2018

HYDERABAD (AP)-02/12/2009: - WIPRO facility in Hyderabad --PHOTO: P.V.SIVAKUMAR

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Wipro is tasting success by bridging the gap with other software biggies

As it plays catch-up with peers in terms of revenue growth, Wipro managed to get past at least one top-tier player in 2014-15.

By focusing more on automation while delivering commoditised application services, the company has also made small-sized acquisitions in the digital space, which might deliver going forward.

Investors with a two-three year horizon can buy the shares of Wipro, given the attractive valuations that it trades at and in the light of its improving business prospects.

At ₹548, the Wipro stock trades at under 14 times its likely per share earnings for 2015-16, which is lower than the 16-20 times peers such as Infosys, HCL Technologies and TCS command. Wipro’s valuation is also lower than its historical band of 15-18 times over the past three years.

In 2014-15, Wipro’s revenue grew 8 per cent over the previous fiscal to ₹46,954 crore, while net profit rose 11 per cent to ₹ 8,653 crore. The IT services segment, the largest division, grew at a faster 10 per cent rate. Wipro’s revenue growth was better than what Infosys managed in 2014-15 (6.4 per cent).

Steady increase in the count of large-sized clients, traction in key segments, as well as growth in many important service lines are positives for the company.

While the US has been a steady growth driver for the company, Wipro has also witnessed increasing demand from India where it is an entrenched player.

An increase in fixed price contracts and improvement in utilisation levels have ensured that operating margins remain stable at 22 per cent levels.

This is despite heavy volatility in global currencies, especially the euro.

Steady improvement

Some of the Wipro’s key verticals such as healthcare, energy, utilities (despite a weak oil price scenario) and telecom have been growing at a healthy pace (8-18 per cent in 2014-15).

Finance solutions, its largest vertical, accounting for nearly 26 per cent of revenue, is also growing, though at a tepid pace.

Offerings such as infrastructure and business process services have grown at 19 per cent and 13.3 per cent respectively in 2014-15, among the best in the industry.

Wipro’s high-margin business application services business continues to grow at a pace faster than the company’s overall revenue rate, indicating that the company has been able to tap into the discretionary spends of clients.

In terms of geographies, the Americas have been strong with 51 per cent of revenues coming from the region. India too has been a progressively strong contributor, growing at double-digits (20 per cent in 2014-15) and now accounts for nearly 10 per cent of the company’s revenue.

As the Government increases spends on various e-governance initiatives, Wipro, which already works with several state agencies, should benefit.

In recent times, domestic spending on IT by the private sector has helped growth.

Strengthening client base

In 2014-15, the company increased its tally of $100-million and $75 million buckets by one each, while 13 customers were added in the various buckets of $10-50 million categories.

Fixed-price contracts, which are more profitable than time and material projects, now account for 54 per cent of the company’s revenue. The proportion has increased by nearly five percentage points over the past year.

Utilisation, at 79.1 per cent in 2014-15, though significantly better than the previous year (74.6 per cent), offers scope for the company to increase productivity. Expectations are that utilisation could move above 80 per cent levels, in line with top-tier peers.

Wipro has recently acquired Denmark-based firm Designit for $95 million. This is expected to bolster its presence in the digital transformation space.

Wipro is keeping step with peers in taking the inorganic route to acquire capabilities in newer areas, which are likely to see higher spend by customers.

Attrition at 16.5 per cent has been relatively stable, but any increase can be a concern.

Also, some clients from the energy segment may be negotiating for pricing discounts, given the fall in oil prices.

Though this is a phenomenon across the industry, it could hurt Wipro’s margins.

Published on July 11, 2015

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