Wipro tumbled on the disappointing report card and FIIs exodus amid the Russia and Ukraine war, what's next?

Wipro is a good investment idea around 590-520 levels, considering a good business model, strong balance sheet, and impeccable corporate governance. The short to mid-term target is around 750-900, while the long-term target is around 1080.

Wipro is a leading Indian MNC and global information technology (IT), consulting, and BPO company. Wipro aims to harness the power of cognitive computing, hyper-automation, robotics, cloud, analytics, and emerging technologies to help its clients adapt to the digital world and make them successful. Wipro has recognized globally for its comprehensive portfolio of services, a strong commitment to sustainability, and good corporate citizenship; Wipro has over 220K dedicated employees serving clients across six continents.

Wipro provides services on Data, Analytics & AI, Applications, Digital Operations and platforms, Consulting, and Infrastructure. Wipro caters to digital/software/hardware services to various industries such as Aerospace & Defense, Automotive, Banking (BFSI), Capital Markets, Communications, Consumer Electronics, Consumer Packaged Goods, Education, Engineering, Construction & Operations, Healthcare, Insurance, Medical Devices, Natural Resources, New Age Markets & Media, and Network & Edge Providers.

Wipro’s service covers a wide range of sectors like Oil & Gas, Pharmaceutical & Life Sciences, Platforms & Software Products, Industrial & Process Manufacturing, Professional Services, Public Sector, Retail, Semiconductors, Travel & Transportation, and Utilities across 1315 active global clients as on Q3FY22. Around 35% of Wipro’s revenue comes from the BFSI segment, 18% from the consumer, 12% each in technology, ENU, and healthcare, 7% from manufacturing, and 5% from communication.

Wipro generated almost 97% of its revenue from IT services, while India's state-run enterprises and IT products contribute around 1% each. U.S. contributes around 54% of total revenue, followed by the U.K. at around 11%, the rest of continental Europe at around 19%, India at 4%, and the rest of the world (APMEA) around 12%. India’s IT and BPO exports are now growing around 11% CAGR in the last 15-years and clocked around $150B in FY21. The growth is driven by increased demand for digital transformation and infrastructure modernization, while digital revenues account for 28%-30% of total industry revenues in FY21. For Wipro IT service revenue has grown by over 4.5% CAGR in the last 10-years. As of Q3FY22, Wipro has 17 clients having revenue over $100M and 47 clients, whose revenue is over $50M.

Wipro tumbled almost -27% (from around 727 to 531) after a disappointed/below estimated Q3FY22 report card coupled with FIIs selling amid Russia-Ukraine geopolitical tension. FIIs sold mainly their holdings in blue chips IT and private banks amid Russian geopolitical tension, as higher oil, higher USDINR would ignite hotter inflation and be negative for the Indian economy. Nifty IT stumbled almost 18% from its January high of 39446.70 to its February low of 32438.25.

Highlights of Wipro’s Q3FY22 result:

At a glance, core operating revenue, profit, EPS, and margin were all muted for Wipro in Q3FY22 on a sequential basis. Subsequently, the stock came under heavy selling pressure and was corrected. Wipro has undergone higher operating expenses in Q3FY22 due to elevated employee compensation costs at Rs.11.49B vs 11.12B sequentially (+3.29%) and 8.27B yearly (+38.77%).

Wipro said about the Q3FY22 report card:

“Wipro has delivered a fifth consecutive quarter of strong performance, both on revenues, and margins. Order bookings have been strong too, and we have added seven new customers in the more than $100 Mn revenue league, in the last 12 months. Our strategy and improved execution continue to serve us well, and we are confident of building on this momentum. We are also excited to have completed the acquisitions of Edgile and LeanSwift Solutions in the quarter, both of which will add to our capabilities significantly.

We delivered robust operating margins after absorbing substantial investments in salary increases, owing to continued improvement in operating metrics. We also improved our working capital, by reducing our Days Sales Outstanding. This has resulted in strong operating cash flow (~Rs.30.1B) conversion, of 101.3% of net income Additionally, we have declared an interim dividend of ₹1 per equity share.”

As guidance for Q4FY22 (Outlook for the quarter ending March 31, 2022), Wipro projected sequential revenue growth of around 2-4% in Constant Currency (CC) term; EBITA margin 17.0-17.5%

“We expect Revenue from our IT Services business to be in the range of $2,692 million to $2,745 million*. This translates to a sequential growth of 2.0% to 4.0%.

*Outlook is based on the following exchange rates: GBP/USD at 1.34, Euro/USD at 1.13, AUD/USD at 0.73, USD/INR at 75.73, and CAD/USD at 0.79”

In Q3FY22, Wipro reported a revenue of $2.64B, translating a sequential growth of +2.3% (in USD) and +3.0% in CC terms, with operating margin 17.6%, which is an improvement of +1.8% sequentially and +5.1% yearly.

Highlights of analyst concall: Q3FY22

·         Wipro closed 11 large deals with TCV (Total Contract Value) of $600M in Q3FY22

·         Order book, which is, frankly the best measure of the demand environment has grown 27% on a year-to-date (YTD) basis in terms of Annual Contract Value (ACV)

·         Order win rate in the market has been improved dramatically due to a change of strategy (cultural shift) and client’s trust in the quality of services

·         Thrust in digital business led by cloud transformation and security amid inorganic expansion

·         On operating margins, at 17.6% in Q3, we are ahead of our stated range of 17% to 17.5%. These margins were delivered after an incremental two months impact of salary increases in September 2021 that covered 80% of our colleagues globally and an equity grant for our senior colleagues

·         In Americas 1, Wipro grew 23% (y/y) and 5.2% sequentially. With all sectors showing strong growth, Communications Media, Information Services grew 30%. Consumer goods and Life Science grew 25%, Healthcare and Medical Devices grew 16% (y/y)

·         Looking at Americas 2, Wipro grew 33% (y/y) with strong growth across BFSI and Manufacturing

·         European business has delivered an outstanding year-on-year growth of 38%

·         Germany, the largest market in Europe, has almost doubled, Benelux grew 24% and our UK business grew 40% year-on-year

·         The momentum on deal wins has accelerated this quarter and our pipeline has several large deals above the $100 million range

·         European business sees a great turnaround

·         We are frankly confident about how they’re shaping up as well. I’m sure you know where we were with our European business a year ago. So, it’s a great turnaround story here

·         APMEA market grew at 13% year-on-year

·         All our major markets are growing sequentially

·         Overall, the other bookings in TCV terms are looking healthy, with 37% year-on-year growth, excluding acquisitions. This should support the growth agenda in this market in the coming quarters

·         But one of the key pilots of our strategy is to grow our existing large accounts and deepen the relationship. So let’s look at that. Our top five customers grew 36% year on year, our top 10 customers grew 37% year-on-year

·         In the last 12 months, we’ve added seven customers in the more than $100 million brackets. And nine new customers in the more than 50 million brackets. This is I believe a significant shift, one that we believe will continue

·         Overall order bookings grew 40% in Q3FY22 every year due to JV with partners

·         Cloud ecosystem revenues also grew and grew at an accelerated pace of 30% on the year-to-date basis

·         Thrust on innovation and talent along with digital business

·         Confident of moderate attrition rate after stabilization in Q3FY22

·         A hybrid model of work, considering the pace of vaccinations, Omicron spikes, and client’s data security/preference of work (WFH/WFO)

·         $3.4 billion of FOREX hedges as of 31^st December

·         Realized an exchange rate of 76.12 (USDINR) for Q3FY22

·         Wipro now has changed its marketing strategy and is monitoring performances on a sequential basis unlike in the past; thus the company is quite confident about the guidance of 2-4% revenue growth in CC for Q4FY22 along with an EBITA margin of 17.0-17.5% despite the mix of inorganic and organic growth strategy

·         Wipro has a pragmatic plan for Shareholder return after careful analysis of operating free cash flow and the likely requirement for M&A (if any) and other operational expenses for the next 3-5 Qtrs

·         Wipro indicated that they have $4.6B cash on the balance sheet and do not need cash beyond 50% of the net income

·         Right now, Wipro has no share buyback plan

·         Going forward, the ramp-up of deal wins is expected to help drive revenues in Q4FY22

·         Wipro guided that its Q4FY22 IT services revenues would be in the range of $2,692-2,745M, which translates to 2.0-4.0% QoQ growth. The growth is largely in line with their historical guidance

·         Wipro indicated that the demand environment continued to be strong, especially on the cloud computing side

·         Wipro may have added 34K employees on the net basis in the last three quarters, with similar numbers added in 11-12 quarters in the past, which is a reflection of a good demand environment

·         Wipro may welcome 70% fresher in FY22 vs. FY21

·         Wipro earlier indicated that attrition could be a pain point for the next few quarters before it stabilizes. However, Wipro is now confident that attrition is expected to moderate from Q4FY22 onwards

·         Wipro indicated that pricing is stable across portfolios while it says that it is probably the right time to discuss pricing with clients; i.e. Wipro may gain pricing power

·         Wipro says that the industry is in the early stage of cloud transformation and there is a massive runway ahead of the industry

·         Operating margin was down because of two months of the incremental impact of salary hikes, but lower utilization, partly offset by continued revenue growth momentum and operating efficiencies

·         The new CEO’s strategy to keep global executives for delivery and hiring leaders to drive growth shows the result (aggressive marketing strategy against prior conservative mentality)

·         Wipro has highlighted that several large deals are in pipeline, while closures can be lumpy and the phase-wise large transformation may lead to limited large closures

Wipro slid after the Q3FY22 result on the disappointing report card. But Q3 is also traditionally a weak quarter for IT exporters because of the lean holiday season overseas. Additionally, USDINR was also depressed in Q3FY22 (cross-currency headwinds). Like all other big IT service providers, Wipro is also a great beneficiary of ‘K’-shaped economic recovery amid COVID disruption as the online world survives in digital mode.

And Wipro recovered from 530 areas after the company announced a $150M deal with ABB, where Wipro was awarded a five-year strategic engagement to drive transformation for ABB’s Information Systems digital workplace services.

Valuation: Rs.750 by Sep’22

Looking ahead, Wipro is in a position to maintain/expand healthy revenue and operating margin amid higher utilization, better productivity (WFH), and increasing automation. This coupled with the company’s vision of transformation, emphasis on cloud migration and the global shift towards digital tech could help Wipro in maintaining incremental growth in revenues and margin amid expected stability in attrition, thrust on automation, and offshoring.

Considering all these factors and current/historical run rate, Wipro may report core operating EPS around 31.24, 37.48, 44.98, and 53.98 in FY22, FY23, and FY24 against the actual FY21 figure of around 26.03 (assuming 20% CAGR on an average). Assuming an average PE of 20, the FY22-25 valuations may be around: 625-750-900-1080. As the market is now discounting FY: 23-24 earnings, Wipro may reach 750 by Sep’22 and 900 by Mar-Sep’23.

Bottom line:

Wipro is a good investment idea around 590-530/520 levels, considering a good business model, strong balance sheet, and impeccable corporate governance/credibility. The short to mid-term target may be around 750-900, while the long-term target (Mar-Sep’24) is around 1080.

Technical View: Wipro (LTP: 600; EOD: 28/03/22)

Looking ahead whatever may be the narrative, Technically Wipro now has to sustain over 590-585 for any meaningful rally towards 630/651-685/727-740/950; otherwise sustaining below 575, it may again slip to 555/545-530/520*-495/475-440/421 and 408*/390-370* levels (* denotes key support/buying levels).

Wipro: P/L account analysis

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