Sharekhan Actionable Ideas: Buy Wipro - CMP Rs 330; Target - Rs 390 (18% Upside).

Dear Friends,

 

We are recommending Buy on our Actionable Ideas "Wipro" as per following:-

CMP: Rs 330      Target: Rs 390 (18% Upside)

Key Points:

Wipro: Stock update - Sector tailwinds to drive growth and profitability, upgrade to Buy

   

• Attractive valuation; Time to upgrade Wipro to Buy: On June 20, 2018, we had upgraded our recommendation on Wipro to Hold, given reasonable valuation post ~10% correction in the stock since our downward rating to Reduce (on October 17, 2017). Since then, the stock has outperformed its peers and CNX IT index. The outperformance was primarily led by the recent large deal win ($1.5 billion+ deal from Alight Solutions) and rupee tailwind. Further, downturn impact on revenue owing to softness in the HPS business along with issues (insolvency of customers in the utilities and communication verticals) is expected to recede over the next 2-3 quarters. With signs of growth pick-up led by large deal wins and anticipated margin improvement, given rupee tailwind and waning impact of existing headwinds, Wipro looks like an attractive bet on the valuation front at 15x its FY2020E (~35% discount to TCS). Hence, we upgrade our rating on Wipro to Buy from Hold with a revised price target (PT) of Rs. 390.                    
• Rupee tailwind along with potential margin revision led to earnings upgrade: The recent rupee depreciation against USD would benefit Wipro in terms of higher EBIT margin. Hence, we have changed INR/USD rate in our model to Rs. 70 for the remaining quarters of FY2019 and Rs. 71.5 for FY2020E and beyond. Further, potential margin expansion on account of gradual subsiding impact of existing headwinds over the next two/three quarters and higher growth would drive earnings performance in FY2020/FY2021. Notably, Wipro has disappointed with its weak EBIT margin performance in IT services (15.6% in Q1FY2019 vs. 21% in Q1FY2016) over the past three years owing to lower growth, internal-specific challenges and significant investments to build digital capabilities. We believe margins would improve in FY2020/FY2021 with the completion of restructuring activities and higher revenue from ramp-up of recent deal wins. Rupee tailwind along with assumed margin expansion would help Wipro to deliver an earnings CAGR of 12% over FY2019-FY2021E, which is almost similar to the expected earnings CAGR of Infosys over the same period.
• BFSI and energy vertical to power growth: Continued growth momentum in its BFSI segment (up 3% q-o-q and 14.4% y-o-y in Q1FY2019) is expected to sustain on account of the absence of client-specific issues in its BFSI client base, early investments in digital technologies for its financial clients and client mining activities. Further, ramp-up of deals signed recently with Alight Solutions in the insurance space would drive BFSI revenue in the coming quarters. In the energy vertical, the company witnesses strong traction with pick-up of investments in the oil and gas segment. Though BFSI and energy and utilities verticals together contribute 42.5% of its total revenue, we believe Wipro would lag its peers in terms of revenue growth rate in FY2019 owing to its existing portfolio concerns and softness in its healthcare and manufacturing verticals.     
• Upgrade to Buy with a revised PT of Rs. 390: The stock of Wipro has recovered its lost ground and has delivered 27% return in the past two months owing to receding headwinds and improving tailwinds on the business front, which we expect to translate into decent growth over the next two years. The stock is currently trading at 15x its FY2020 EPS estimates, which is at ~35%/12% discount to TCS/Infosys, while earnings CAGR is expected to be similar to Infosys over FY2019-FY2021E. After a series of multiple de-rating in the past few years, we now expect scope for re-rating owing to better growth visibility. On account of the reset of USD/INR rate along with potential margin expansion and higher growth, we have revised upward our earnings estimates by 1%/5% for FY2019E/FY2020E and have introduced FY2021 numbers in this note. Consequently, we have revised upward our PT to Rs. 390, driven by earnings upgrade and rollover of target multiple to average FY2020/FY2021E EPS and have upgraded our rating on the stock to Buy (from Hold rating earlier).

 

 Regards,

 

Sharmila CRE
F1,Achyuta,111,bharathidasan salai,
Cantonment
Trichy-620001
Tel:04314000706
Ph:8144517351

 

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