Wipro Limited: BUY

Among the top-tier IT players, Wipro, which was lagging peers earlier, has over the past few quarters been able to put together the ingredients of growth. Investors with a two-year horizon can consider buying the stock of the software major.

On the revenue growth front, Wipro has steadily caught up with the other top-tier players such as Infosys in the past three quarters and, in fact, had the best sequential revenue growth among large IT companies in the December quarter.

The company’s management too has increasingly tended to give bullish commentaries.

The stock’s valuation is attractive compared with its peers. At ₹601, it trades at 15 times its likely 2015-16 per share earnings. This makes it much cheaper than Infosys, TCS, and HCL Technologies that trade at 17-20 times.

In the first nine months of 2014-15, Wipro’s revenue grew 9.7 per cent over the same period in the previous fiscal to ₹35,146 crore, while net profit rose 14.6 per cent to ₹6,381 crore.

Healthy additions in large-sized clients, traction in key segments as well as growth across service lines are key positives for the company.

While the US has been a steady driver of growth, 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.

Despite an economic slowdown in Europe, most Indian IT players, including Wipro, have not witnessed any dip in outsourcing; on the contrary, there has been increasing traction from the geography.

Some of the key verticals such as healthcare, energy, utilities and manufacturing have been growing at a healthy pace for Wipro. Finance solutions, its largest vertical, accounting for nearly 26 per cent of revenue, is also growing, though at a tepid pace.

Its high-margin business application services business continues to grow at a pace faster than the company’s overall revenue rate.

This suggests that Wipro has been able to tap discretionary spends of clients.

Other offerings, such as infrastructure services and product engineering, too have witnessed robust traction.

In terms of geographies, the Americas have been the strongest with 51.4 per cent of revenues coming from the region.

India too has been a progressively strong contributor, growing at double-digits and now accounts for 9.6 per cent of the company’s revenue, up from 8.5 per cent in December 2013.

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 from the region.

In the last year, the company increased its tally of $75-million clients by one to 15, while three were added in the $50-million category. As many as 21 customers were added in the $10- and $20-million buckets.

Fixed-price contracts, which are more profitable than time and material projects, now account for 55.1 per cent of the company’s revenue, the proportion increasing by nearly five percentage points over the past one year.

Utilisation, now at 75.9 per cent, though significantly better than the previous year, offers scope for the company to increase productivity.

Expectations are that utilisation could move to 80 per cent levels, in line with top-tier peers. Attrition, at 16.5 per cent, has been increasing and is a concern. Also, some clients from the energy segment may be coming back for pricing discounts, given the fall in oil prices.

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

Wipro is likely to end the fiscal 2014-15 with revenue growth similar to that of Infosys (7-8 per cent in dollar terms).

But with many business and operational factors in revival mode, the company can be expected to start matching industry growth rates from 2015-16.

COMMENT NOW