WIPRO: Largely in line; lower ETR drives a beat in profitability

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Operational performance largely in line: Revenue grew 3.8% YoY CC (our estimate: 4.1%) in 2QFY20. IT Services’ EBIT margin expanded 310bp YoY to 18.1% (our estimate: 18.7%), while PAT rose 12% YoY to INR25.6b – a 14.4 % beat, mainly led by a lower-than-expected ETR (18.3% v/s our estimate of 22.5%). Sequentially, revenue was up 1.1% CC (our estimate: 1.3%; company guidance: 0%-2%), while the margin contracted 30bp led by lower utilization and the two-month impact of wage hike.

Cautious outlook on BFSI: After remaining in double digit for around two years, WPRO’s BFSI revenue growth decelerated sharply to 5.9% YoY CC owing to the completion of some large programs and the weakness in capital markets (in the US and Europe). Macro uncertainty translated into cautious commentary on this vertical. Apart from this, HPS in healthcare remained another pocket of concern and is built in the company’s revenue growth guidance of 0.8%-2.8% QoQ for 3QFY20. Growth is likely to be led by communications in the US, a recovery in healthcare (outside of HPS) and manufacturing segments.

Tepid momentum in top clients: Revenue from the top client declined 11.8% YoY, led by the non-renewal of projects and the delay in ramp-ups. Overall, the weak performance of the top BFS clients was offset by healthy spends from clients across other verticals.

Valuation view:  CC revenue estimates for FY19-21 are moderated by 0.4%-1.1%. We do not make any meaningful revisions to our margin estimates. However, our FY20 EPS estimate is upgraded by ~3% due to the lower ETR expectation. WPRO’s overall growth continues lagging peers, given company-specific execution challenges. Consequently, we do not see material headroom for a re-rating of the current valuation multiples. Our price target of INR260 discounts forward earnings by 15x. Maintain Neutral.

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(Report from Motilal Oswal Institutional Equities)

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