Add Wipro, target Rs 290: Centrum Broking
Wipro is a largecap company, operating in information technology sector.
Shares of Wipro traded at Rs 264.25 around 1:15 pm on 22 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.
Investment rationale by the brokerage:
Tepid revenues led by weakness in key verticals
Q1FY20 revenue stood at $2,039 million, down 1.8 per cent quarter-on-quarter (QoQ) and below our estimate ($2,076 million).
Adjusted for Workday divested business, dollar revenues declined by 1.3 per cent QoQ. Constant currency revenues declined by 0.7 per cent QoQ, below the brokerage's estimate.
"We expected 0.6 per cent QoQ cc revenue growth," said the brokerage.
Wipro guided to Q2FY20 IT Services dollar revenue growth of 0-2 per cent QoQ. The guidance remains tepid especially at the lower end.
The management of the company cited that recent macro challenges have led to volatility in select verticals (capital markets segment in BFSI, manufacturing vertical in Europe etc.).
Adjusted IT Services EBIT margin at 18 per cent below our estimates
Consolidated Ebitda margin came in at 19.9 per cent, down 90bps QoQ (the brokerage's estimate: 20.1 per cent) in line with estimates.
IT Services Ebit margin was 18.4 per cent, down 60bps QoQ (the brokerage's estimate: 18.6 per cent).
There is other operating income of Rs 69.9 crore led by gain from Data center business and Workday business sale.
Adjusted for the same, IT Services Ebit margin stood at 17.9 per cent below our estimates (the brokerage's estimate: 18.6 per cent).
PAT came at Rs 2,400 crore which is 3 per cent below the brokerage's estimates (Rs 2,480 crore) led by revenue miss.
Valuation and risks
Q1FY20 has seen a tepid execution with weak performance in key core verticals.
BFSI, consumer, manufacturing, healthcare vertical revenues were down 0.6 per cent, 4.4 per cent, 2 per cent and 1.5 per cent QoQ, respectively, and remained weak.
Revenues from Top 5 and Top 10 accounts declined by 1 and 0.3 per cent QoQ, respectively.
However, digital business continued to maintain momentum and now accounts to 37.4 per cent of total revenues (up 5.5 per cent QoQ and 37 per cent YoY).
"While Wipro’s margin trajectory has been steady over past few quarters, we believe pent up investments (strategy adopted by Infosys) might be crucial in building and sustainably scaling growth in key verticals," said the brokerage.
Net cash on balance sheet stands at Rs 31,900 crore as on Q1FY20. Factoring an outgo of Rs 10,500 crore for the buyback, Wipro would still have net cash of Rs 21,400 crore on balance sheet (nearly 13.8 per cent of m-cap).
"While Wipro’s top-line growth remains modest compared with its peers, strong FCF generation, robust net cash on the balance sheet and reasonable valuation (14.2 times FY21E EPS) would limit downside," the brokerage added.