Wipro: Things are adding up; retain REDUCE | Fundamental Analysis | Outlook | Indianotes.com

We met Wipro Ltd. (WPRO) CFO in Bengaluru and believe 3Q, quarter-to-date, is tracking well. Acceleration in BFS & manufacturing, traction in top/top 2-5 customers, improving deal win rates, and plugging of leakages suggests mid-point of the 3Q (CC) guide is possible. Further delivery turnaround, utilization improvement could aid IT services margin trajectory. Valuations, however, are pricing in some of these positives and leaves limited room for disappointment. Retain REDUCE with Dec‟18 TP of Rs 267 (14x Dec‟18 TTM EPS of Rs 19). Await better entry to turn BUYers.

3Q tracking well
: Discussion suggests demand is tracking well led by traction in financial services, manufacturing, while the drag in energy is likely over. Healthcare could bottom in 3Q with likely recovery 4Q onwards. Engineering business seems to be performing well driven by growth in embedded software.

Mining rhythm working well: Mining rhythm, which struggled for years, is working well, led by fixing of core issues, and is complementing „hunting‟ better. As highlighted earlier, Wipro incrementally is looking to sell “integrated services deals” which necessary means selling of 3+ services into an account (each contributing at-least 10%). This also leads to higher credits for the salesperson. Finally, right alignment of client sales partners with key accounts is helping to fulfill demand which otherwise would have reached competition.

Likely winning wallet share in top customers: Growth across top customers continues to be robust and likely reflects the outcomes of the mining initiatives and improving win rates. Top customer revenues grew 25.3% yoy (1Q: 18.5%) while top 2-5 customer revenues grew 10.7% yoy (1Q: -3.1%) (refer exhibits 2a, 2b).

Win rates improving too:
Deal velocity has generally improved led by healthy pipeline, improved closures, and better alignment with sourcing advisors and is likely driving strength in BFSI.

Retain REDUCE:
Management is executing along a well-articulated strategy and commentary suggests portfolio growth challenges are getting addressed. Valuations (current TTM PE of 16.8x is at a 3% premium to Sep‟12-17 average of 16.3x) are pricing in E&U/healthcare recovery, continued acceleration in BFSI, top customers, and consistent execution (margins) over a couple of quarters and leaves limited room for disappointment. Key upside triggers could be earlier-than-anticipated recovery in healthcare, energy vertical and consistent margin expansion.
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