Below is the Stock Analyst Note that Morningstar Analyst Swami Shanmugasundaram posted after Wipro's quarterly results declaration on April 25.
His fair value estimate for the stock is at Rs 620 per share, and the closing price of Rs 403 on April 26 makes it a five-star stock.
To view the complete Stock Analyst Report, click here (free registration is mandatory).
Wipro reported fourth-quarter results that were in-line with our expectations and we are maintaining our fair value estimate.
Revenue from Wipro's IT services business grew 2% sequentially and 10% year over year to $1.54 billion.
During the quarter, the company benefited from a strong showing from energy and retail industry verticals while BFSI and telecom declined. In terms of geography, Asia-Pacific and other emerging markets led the company from the front.
Wipro's results indicate that while the company continues to lag behind its Tier 1 peers in terms of growth, client penetration, and employee retention, the gap is gradually closing. The firm has made notable progress since the new management rolled out various restructuring measures at the beginning of this fiscal year.
The company ended the quarter with seven clients contributing more than $100 million each in revenue per annum (up from three clients in the year-ago period) while the number of clients generating more than $10 million in revenue increased from 106 to 121. Further, the average size of the top 10 accounts has gone up to $130 million from $110 million a year earlier.
On the supply side, Wipro showed incremental progress in its effort to keep its employee attrition under control. At the end of the fourth quarter, the company's TTM attrition rate stood at 14.4% as against 22.7% over the same period last year.
Management noted that it plans to raise wage levels across the board in June. While the amount of the hike is not known, we expect it to be in line with the industry.
TCS recently announced that it is raising wages for workers in India by 8%. At this time, Infosys remains the odd one out in terms of freezing wages, which we believe will make it easier for companies like Wipro to poach talent.
Wipro's fourth-quarter operating margins came in at 20.8%, down 130 basis points compared to last year. Margin compression was partly due to a shift in the onsite/offshore effort mix (with more work getting executed onsite) and management noted that this is a temporary phenomenon as Wipro ramps up on several new assignments.
As these projects mature, the onsite/offshore effort mix should return to more normal levels, which in turn should boost the margins.
Overall, we think it was a good quarter from Wipro and believe that the firm is on the right track.