Wipro Ltd
Wipro, one of the largest India-based global IT services providers, stands out from its peers thanks to its unique revenue and market mix. Its IT services business, which accounts for nearly 90% of total revenue, has built a niche in some emerging services, which should help the company stay ahead of the competition. Another key differentiator for Wipro is its focus on research and development services (10% of revenue), which normally do not fall under clients' discretionary budgets, and therefore, aren't as severely affected during an economic slowdown.
Wipro reported second-quarter 2015 results that were in line with expectations. IT services revenue for the quarter totaled $1.771.5 billion which was within the company’s currency-adjusted guidance of $1.749 billion-$1.788 billion.
Encouragingly, the firm announced a number of new key deals with companies such as CLK Enerji, Philip Morris, and BP across a multitude of services, which signifies the strength of Wipro’s end-to-end portfolio.
Management noted continued strength in North America during the quarter, while Europe was weaker given macroeconomic and geopolitical concerns. Still, we see an increasing growth opportunity in Europe given the underpenetrated nature of outsourcing in the region and an increasing willingness to outsource.
We think Wipro continues to be a market leader in infrastructure services. The firm’s Global Infrastructure Services segment was again its standout business practice, growing 8.1% sequentially and 22.6% YoY to $475 million. The company’s five year infrastructure management deal with Philip Morris International was a particular highlight.
Operating margins dipped to 22.0% as Wipro’s wage increases from the first quarter had an impact. We expect margins to oscillate around the low-20s as the company remains focused on top-line growth rather than margins.
Wipro mentioned that competition had intensified over the last few years, and we think the market will remain highly competitive. Over the next few years, we expect the company to invest greater resources in productivity and platforms and move away from the headcount-revenue growth model as it seeks to do more with less.
Economic Moat: Narrow
Wipro earned its narrow moat on the strengths of its broad service portfolio, entrenched client relationships, and strong industry knowledge. The company's wide range of service capabilities makes it a one-stop shop for its clients' IT services needs. Additionally, the company's diverse portfolio makes it less susceptible to feeling the impact from any slump in the demand environment in any particular part of its business.
As Wipro works with its clients, it develops a deep understanding of their systems and business processes, which makes it difficult for its clients to switch their service providers. The company's client retention rate consistently stayed above 95% during the past few years. Wipro also has a large and diversified client base (more than 925 active clients) with the top 10 clients accounting for little more than 20% of its total revenue.
Fair Value Estimate: Rs 570
Our primary operating assumptions for the company's IT services business remain largely intact, and the firm is on pace to meet our fiscal 2015 projections. We expect the company to continue to benefit from secular trends such as vendor consolidation and increased adoption of offshore outsourcing by companies worldwide. However, we think near-term performance will remain choppy as companies remain cautious on their discretionary IT spending in an uncertain economic environment.
While we expect Wipro to witness broad-based growth across all its industry verticals, we remain bullish on its four core verticals: financial services, energy, retail, and health care. We believe these segments will be the primary growth drivers.
Overall, we expect compound annual revenue growth of 11% (after adjusting for the divestiture) during our 5-year forecasting period. We expect profitability to improve nominally during the next five years. Margin expansion will be largely driven by the separation, as non-IT businesses had a lower-margin profile compared with IT services business.
We forecast operating margins to expand to 22% in fiscal 2019 from 19.8% in fiscal 2014 as Wipro benefits from its nonlinear initiatives.
Risk
- Wipro is exposed to cyclical downturns in technology spending. Any weakness in the economic climate could curtail corporate outsourcing budgets, hindering Wipro's growth.
- The company's revenue and margins would be hurt if the Indian rupee were to appreciate strongly against the U.S. dollar.
- The adoption of cloud and software as a service poses a long-term threat, as these options minimize the total cost of implementation for service providers like Wipro.
Infosys
TCS
