The following is the Stock Analyst Note issued on Wipro by Morningstar Analyst Swami Shanmugasundaram following its fourth-quarter earnings. Registered Morningstar Members gain exclusive access to our full Wipro Analyst Report PDF, including fair value estimates, consider buying/selling prices, bull and bear breakdowns, and risk analyses. Not a Registered member? Get these reports immediately when you sign up with Morningstar for free.
Wipro reported fiscal fourth-quarter results that were largely in line with our expectations, and we plan to maintain our fair value estimate and moat rating for the company.
Wipro’s IT services business generated revenue of $1.58 billion in the fourth quarter, up 1.4% sequentially and 5.2% year over year on a constant currency basis. The company’s top-line growth once again lagged behind the likes of Tata Consultancy Services and HCL Technologies, indicating that Wipro is still trying to find its groove.
In the past, Wipro struggled from unfavorable portfolio mix and execution issues. The company has made substantial progress in tuning its operating model but its higher exposure to the telecom sector, including its legacy research and development work for telecom equipment manufacturers, continues to hinder its growth prospects.
Revenue from telecom declined 3.1% on a sequential basis. Wipro’s recent investment patterns indicate that the firm is gradually shifting its focus away from the telecom vertical. However, given its size within the company (14% of the total business), we expect telecom to be a drag in the near term.
On the other hand, the company’s recent investments in energy and health-care verticals seem to be paying dividends as the firm reported solid growth numbers (3.3% sequential growth in both) in these two verticals.
Wipro’s operating margin declined 50 basis points year over year to 20.2%, largely due to currency impacts. Additionally, we think that Wipro’s low employee utilization rate is also putting pressure on its margins.
The company’s fourth-quarter utilization rates stood at 74.6%, down from 76.1% in the same period last year. Given that utilization rates have gradually inched up across the industry over the last few years (from high 70% range to low 80% range), we think Wipro has a lot of headroom to improve.
During the year, Wipro reported steady improvements in its client penetration and employee retention. Revenue from top 5 and 10 accounts grew 19.9% and 16.8% respectively, handily beating the 5% overall growth.
Wipro’s voluntary employee attrition rate came in at 13.7% down from 17.5% in the year-ago period. These numbers show that Wipro is on the right track.