Hold Wipro; target of Rs 600: Emkay

Emkay Global Financial Services research report on Wipro>> Wipro continues to highlight the initiatives in client mining, large re-bid opportunity and automation that it has taken over the past 2 years to cut underperformance V/s peers>> The US$ 1bn+TCV ATCO transaction is not ‘NPV negative’, per management. It solidifies presence in Energy & Utilities segment with opportunity to make headway into other Utilities>> Wipro’s turnaround initiatives have yielded mixed results; despite strong deal wins Wipro continues to lag peers on growth; FY15 to be the 3rd yr of <10% US$ revenue growth>> Tweak FY15/16E EPS higher by 1/3% to Rs 36/40 on modest margin increases. While we retain HOLD, recent stock underperformance could support near term trading upsides. Infosys and TCS remain top picks“Wipro has taken several initiatives through FY13-14 to address the inherent issues with (1) client mining, (2) addressing the large rebid opportunity in Infrastructure Services along with (3) driving automation in delivery which has aided an improvement in margins through most of FY14. The concentrated efforts along these dimensions have resulted in improvement on some counts like better growth in revenues from top clients( note that Wipro’s revenue growth from top 5 clients was impressive at 18%/15% YoY in FY13/14 V/s company wide growth of 5%/6.4% YoY ) albeit in recent quarters the progression in client metrics has disappointed. Wipro has made course correction in the Infrastructure segment winning it’s fair share of business in the rebid market recently (3.5% CQGR V/s company wide revenue growth of 2.3% CQGR through the past 4 quarters). While these initiatives are in the desired direction, results remain mixed with Wipro continuing to trail peers with Wipro’s revenue growth to be <10% YoY in US$ terms for the 3rd year in a row in FY15.”  “Wipro management does not agree with the street’s assessment of the ATCO transaction being NPV negative indicating that although the deal will involve onsite delivery in the initial years, it could improve margins through automation and moving to a variable pricing model over time. Further this transaction solidifies Wipro’s lead in the vertical lending Wipro with both cross sell opportunities within ATCO and other E&U clients in Canada and Australia. Wipro could potential use ~500 resources taken over as part of this transaction to service other E& U clients. While we broadly retain our US$ revenue estimates, we increase our FY15/16E earnings by 1/3% each to Rs 36/40 on higher margin assumptions. We also introduce FY17E earnings at Rs 44.4. We retain HOLD on Wipro with a revised TP of Rs 600, based on 15x FY16 P/E ( compared to 20x for TCS and 16x for Infosys).Valuations at ~14x FY16E earnings are inexpensive and given recent underperformance V/s peers could provide short term trading upsides. We retain Infosys and TCS as our top picks in the sector,” says Emkay Global Financial Services research report.   

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