Wipro Ltd. - Moneycontrol

Wipro Ltd.

RESULT UPDATE

22nd January, 2018

India Equity Institutional Research II

Result Update - Q3FY18

II 22nd January, 2018

Wipro Ltd.

Page 2

Tepid Performance, Margins Dragged

CMP

Target

Potential Upside

Market Cap (INR Mn)

Recommendation

Sector

INR 322

INR 337

4.6%

1,485,713

Hold

IT

Result highlights •In dollar terms, Net Sales in Q3 FY18 stood at $2,079 Mn which was above our estimate of $2,061 Mn, which grew by 3.3% qoq and 9.3% yoy •By Geography: Europe led the growth pack with a 6.2% qoq followed by India & Middle-East grew by 1.0% qoq. However, US and other Emerging Markets saw a decline of 1% and 3.5% respectively. •By Industry: Financial Solution and HLS grew by 3.2% and 2.2% respectively, both these segments have started gaining traction for digital services and they have contributed the most in deal wins during the quarter. Energy & Utility saw a decline of 8.2% qoq due to customer insolvency •By Services: Application service and Global Infrastructure Service saw a decline of 0.5% qoq and 0.7% qoq respectively owing to seasonality coupled with furloughs MARKET DATA

KEY FINANCIALS

Shares outs (Mn)

4523

EquityCap (INR Mn)

9047

Mkt Cap (INR Mn)

1485713

52 Wk H/L (INR)

335/223

Volume Avg (3m K)

2

Bloomberg Code

WPRO IN

FY17

FY18

FY19E

FY20E

512,440

550,402

545,100

565,519

597,778

EBITDA

109,844

112,900

111,559

124,314

135,183

PAT

88,922

80,813

87,064

100,304

110,910

18.1

16.4

18.1

20.9

23.1

EBITDA Margin

21.4%

20.5%

20.5%

22.0%

22.6%

NPM

17.4%

14.7%

16.0%

17.7%

18.6%

EPS

2311.0

Face Value (INR)

FY16

Net Sales

Particulars (INR Mn)

Source: Company, KRChoksey Research

Seasonality and Client Insolvency hit the growth The quarter has seasonally been wreaked for the company, where the majority of its business verticals saw a sequential decline except Financial Services and Healthcare, Life Sciences & Services (HLS) that grew by 2.2% qoq after a continuous decline for the last four quarters. Energy & Utility has affected the most due to client insolvency during the quarter. The management remained shy to disclose the meaningful impact that it would cause to the revenues going forward. The adverse event had a substantial impact on its margin that has declined by 240 bps to 14.5% qoq, which includes the investments as well as the costs that have gone into establishing the deal.

SHARE PRICE PERFORMANCE 130

110

The company’s performance remains stale compared to its close peers as far as the business verticals are concerned. The company is still reviving from the restructuring of its Middle-East and Europe business units, where the majority of the deals originate for ENU vertical. Moreover, the market dynamics remained volatile for the two regions which has again adversely affected its performance.

90

Wipro Ltd

Sensex

MARKET INFO SENSEX

35798

NIFTY

10966

Jan-18

Jul-17

Jan-17

Jul-16

Jan-16

Jul-15

Jan-15

70

Outlook Remains Positive The company has been positive while delivering the outlook on the back of healthy pipeline for its digital services, which has contributed 25% to its overall revenues. There are few projects which are running on pilot and others are in queue for Proof of Concept (POC), which are expected to go live in the next couple of quarters. Moreover, the penetration of $50 Mn+ clients on digital services has increased especially on Cloud Computing, Blockchain, and IoT. The company has given a revenue guidance within a range of 1%-3% qoq in Q4 FY18. Key Concall Highlights: (i) Customer satisfaction has improved by 410 bps, which improves Wipro’s ability to re-new and cross-sell to a large accounts (ii) The company has filled 200 additional patents in last 9 months, which makes the overall patents to 1800 (iii) Revaluation of deferred tax and liabilities due to revised tax rate in the US led the ETR reported at 21.7% (iv) Adjusted margin for IT services was reported at 17.2%

SHARE HOLDING PATTERN (%) Particulars

Dec 17

Sep 17

Jun 17

Promoters

74.33

73.25

73.25

FIIs

9.79

9.75

10.2

DIIs

5.38

5.88

5.77

Others

10.5

11.12

10.78

Total

100

100

100

ANALYST Vaibhav Chowdhry, [email protected], +91-22-6696 5571 Pritesh Thakkar, [email protected], +91-22-6696 5429

4.7%

12.9%

Revenue CAGR between FY 18E and FY 20E

PAT CAGR between FY 18E and FY 20E

KRChoksey Research is also available on Bloomberg KRCS Thomson Reuters, Factset and Capital IQ

+91-22-6696 5555 / +91-22-6691 9576 www.krchoksey.com




Page 3

Wipro Ltd. Valuation and view The company’s relative performance remained sluggish for Q3 FY18 owing to revival from its restructuring business activities, client insolvency, and furloughs. We believe the strong traction and a healthy pipeline for its digital services especially on BFSL and HLS buckets, would help company revive and deliver better performance going forward. However, the company’s revival from India & Middle East businesses coupled with adverse impact from the client insolvency, blurring the overall impact on its top-line as well as the margins. We remain conservative on its overall performance compared to its peers, which have grown at a substantial rate while improving their profitability despite seasonal headwinds. We have given a “HOLD” rating to the stock and we assign a multiple of 14.6x to its FY20E EPS of INR. 23.1 to arrive at a target price of INR 337.

Exhibit 1: Q3 FY18 Result Snapshot Particulars (INR Mn) Net Sales ($ Mn) Net Sales (INR Mn) Cost of sales Gross profit

Q4 FY17 2,079 136,690 95,976 40,714

Q3 FY17 2,014 134,234 94,694 39,540

Q-o-Q change % 3.3% 1.8% 1.4% 3.0%

Q4 FY16 1,903 136,878 96,576 40,302

Y-o-Y change % 9.3% -0.1% -0.6% 1.0%

Q4 FY17 Estimate 2,061 135,514 94,347 41,167

11,073 9,991 -125 20,939 19,775 5,279 25,054 1,205 6,144 24,714 5,355 -12 19,371 4.0 4,809

9,867 7,085 -453 16,499 23,041 5,200 28,241 1,386 6,666 28,321 6,426 -22 21,917 4.5 4,854

12.2% 41.0% -72.4% 26.9% -14.2%

9,226 8,610 -767 17,069 23,233 5,410 28,643 1,366 5,719 27,586 6,440 52 21,094 4.4 4,847

20.0% 16.0% -83.7% 22.7% -14.9%

10,028 7,995 -453 17,570 23,597 5,882 29,479 1,134 6,023 28,486 6,463 142 21,880 4.5 4,854

Deviation % 0.9% 0.9% 1.7% -1.1%

Operating expenses: Selling and marketing expenses General and administrative expenses Foreign exchange (gains)/losses, net Total operating expenses Operating Profit Depriciation EBITDA Interest Paid Non-operating Income Profit Before Tax Less: Total Tax Non-controlling interest PAT Diluted EPS (INR) Diluted Shares Outstanding (mn) Margin Analysis(%) Operating Profit Margin PBT Margin NPM Effective Tax Rate(%)

14.5% 18.1% 14.2% 21.7%

17.2% 21.1% 16.3% 22.7%

70.2% 8.1%

70.5% 7.4%

Cost Analysis % Cost of sales / Total Sales Selling and marketing expenses/Total Sales

-11.3% -13.1% -7.8% -12.7% -16.7% -45.5% -11.6% -10.8% Change in bps -270 -302 -216 -102 Change in bps -33 75

17.0% 20.2% 15.4% 23.3%

70.6% 6.7%

-12.5% -11.8% 7.4% -10.4% -16.8% -123.1% -8.2% -7.4% Change in bps -251 -207 -124 -168 Change in bps -34 136

17.4% 21.0% 16.1% 22.7%

69.6% 7.4%

19.2% -16.2% -15.0%

-13.2%

-11.5% -10.6% Change in bps -295 -294 -197 -102 Change in bps 59 70








Page 4

Wipro Ltd. Exhibit 1: Q3 FY18 Profit & Loss Statement INR Mn

FY16

FY17

FY18

FY19E

FY20E

512,440

550,402

545,100

565,519

597,778

9.1%

7.4%

-1.0%

3.7%

5.7%

Employees Cost

356,724

391,544

381,824

387,990

405,139

SG&A

62,562

72,838

73,355

74,366

78,608

Forex gains/(losses), net

(3,867)

(3,777)

(1,056)

(500)

(500)

Total Op. Expenditure

415,419

460,605

454,123

461,856

483,247

EBIDTA

109,844

112,900

111,559

124,314

135,183

1.5%

2.8%

-1.2%

11.4%

8.7%

Less: Depreciation

12,823

23,103

20,583

20,651

20,651

Operating Profit

97,021

89,797

90,977

103,663

114,532

1.7%

-7.4%

1.3%

13.9%

10.5%

Interest Paid

5,582

5,183

4,955

5,025

5,025

Non-operating Income

23,280

21,660

26,104

30,787

33,603

Profit Before tax

114,719

106,274

112,125

129,425

143,109

Tax

25,305

25,213

24,972

28,862

31,913

492

248

90

259

286

0

0

0

0

0

Net Profit

88,922

80,813

87,064

100,304

110,910

Adjusted Net Profit

88,922

80,813

87,065

100,306

110,917

Diluted EPS (Rs.)

18.1

16.4

18.1

20.9

23.1

Growth (Y-o-Y) %

2.9%

-9.1%

10.3%

15.2%

10.6%

Adjusted Diluted EPS

18.1

16.4

18.1

20.9

23.1

Growth (Y-o-Y) %

2.9%

-9.1%

10.3%

15.2%

10.6%

Total Revenues Revenue Growth (Y-o-Y) Less:

EBIDTA Growth (Y-o-Y)

Operating Profit Growth (Y-o-Y)

Minority Interest Share in earnings of affiliates








Page 5

Wipro Ltd. Exhibit 2: Q3 FY18 Balance Sheet INR Mn

FY16

FY17

FY18 E

FY19E

FY20E

4,941

4,861

4,636

4,636

4,636

Reserves & Surplus

496,539

515,443

566,058

629,689

703,929

Equity

501,480

520,304

570,694

634,325

708,565

Net Worth

501,480

520,304

570,694

634,325

708,565

2,224

2,391

1,569

1,810

2,002

Total Loans

125,221

142,412

132,412

122,412

112,413

Capital Employed

634,033

671,721

711,289

765,161

829,594

Gross Block

144,068

156,542

166,542

180,542

198,542

Less: Depreciation

85,327

95,699

116,282

136,933

157,584

Net Block

58,741

60,843

50,260

43,609

40,958

Liabilities Equity Capital

Minority Interest

Assets

Capital WIP

6,211

8,951

8,951

8,951

8,951

Investments

132,944

299,133

299,133

299,133

299,133

Intangible Assets

117,832

141,718

141,718

141,718

141,718

Others - A

12,011

12,114

12,114

12,114

12,114

5,390

3,915

5,451

5,655

5,978

Sundry Debtors

102,380

94,846

110,513

114,653

121,193

Cash and Bank Balance

137,671

53,101

71,889

102,213

163,492

Loans and Advances

155,941

80,013

103,569

135,724

173,356

Total Current Assets

427,090

259,345

318,786

386,634

494,027

Sundry Creditors

68,187

65,486

69,042

70,157

73,258

Provisions

37,057

37,782

36,459

42,138

78,507

Other Current Liabilities

15,552

7,115

14,173

14,703

15,542

Total Current Liabilities & Provisions

120,796

110,383

119,673

126,999

167,307

Capital Applied

634,033

671,721

711,289

765,161

829,594

Current Assets Inventories

Less:Current Liabilities & Provisions








Page 6

Wipro Ltd. Exhibit 3: Q3 FY18 Ratio Analysis INR Mn

FY16

FY17

FY18

FY19E

FY20E

EBITDA Margin (%)

21.4%

20.5%

20.5%

22.0%

22.6%

Tax / PBT (%)

22.1%

23.7%

22.3%

22.3%

22.3%

Net Profit Margin (%)

17.4%

14.7%

16.0%

17.7%

18.6%

RoE (%)

18.1%

15.7%

15.4%

16.2%

16.1%

RoCE (%)

15.6%

12.9%

12.8%

13.8%

14.1%

Current Ratio (x)

3.54

2.35

2.66

3.04

2.95

Dividend Payout (%)

47.1%

12.7%

42.1%

36.6%

33.1%

BV Per Share (Rs.)

101.8

105.6

118.7

131.9

147.3

Debt/ Equity (x)

0.25x

0.27x

0.23x

0.19x

0.16x

Interest Coverage (x)

19.7x

21.8x

22.5x

24.7x

26.9x

Interest / Debt (%)

5.47%

3.87%

3.61%

3.94%

4.28%

Debtors days

73

63

74

74

74

Creditors days

60

52

55

55

55

Inventory Days

5

3

4

4

5

Key Operating Ratios

Financial Leverage Ratios

Turnover Ratios


Exhibit 4: Q3 FY18 Free Cash Flow Analysis INR Mn EBITA

FY16

FY17

FY18E

FY19E

FY20E

97,021

89,797

90,978

103,665

114,539

Less: Adjusted Taxes

21,401

21,304

20,262

23,117

25,541

NOPLAT

75,620

68,493

70,716

80,548

88,998

Plus: Depreciation

12,823

23,103

20,583

20,651

20,651

Gross Cashflow

88,443

91,596

91,299

101,199

109,649

Less: Increase in Working Capital

3,928

174

8,236

(1,017)

(30,342)

Operating Cashflow

84,515

91,422

83,062

102,216

139,991

Less: Net Capex

23,569

27,945

10,000

14,000

18,000

Less: Increase in Net Other Assets

74,844

(49,861)

23,843

31,383

36,601








Page 7

Wipro Ltd. Wipro Ltd.

Rating Legend

Date

CMP (INR)

TP (INR)

Recommendation

Our Rating

Upside

22-Jan-18

322

337

HOLD

Buy

More than 15%

26-Apr-17

494

531

ACCUMULATE

Accumulate

5% – 15%

27-Jan-16

473

495

HOLD

Hold

0 – 5%

19-Oct-16

499

522

HOLD

Reduce

-5% – 0

Sell

Less than – 5%

ANALYST CERTIFICATION: We, Vaibhav Chowdhry (B.Com, MBA), research analyst and Pritesh Thakkar (MBA, B.Com), research associate, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & Conditions and other disclosures: KRChoksey Shares and Securities Pvt. Ltd (hereinafter referred to as KRCSSPL) is a registered member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX Stock Exchange Limited. KRCSSPL is a registered Research Entity vides SEBI Registration No. INH000001295 under SEBI (Research Analyst) Regulations, 2014. We submit that no material disciplinary action has been taken on KRCSSPL and its associates (Group Companies) by any Regulatory Authority impacting Equity Research Analysis activities. KRCSSPL prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analyst covers. The information and opinions in this report have been prepared by KRCSSPL and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of KRCSSPL. While we would endeavor to update the information herein on a reasonable basis, KRCSSPL is not under any obligation to update the information. 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Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. Our employees in sales and marketing team, dealers and other professionals may provide oral or written market commentary or trading strategies that reflect opinions that are contrary to the opinions expressed herein, .In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. 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It is confirmed that, Vaibhav Chowdhry (B.Com, MBA), research analyst and Pritesh Thakkar (MBA, B.Com), research associate, of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Compensation of our Research Analysts is not based on any specific brokerage service transactions. KRCSSPL or its associates (Group Companies) collectively or its research analyst do not hold any financial interest/beneficial ownership of more than 1% (at the end of the month immediately preceding the date of publication of the research report) in the company covered by Analyst, and has not been engaged in market making activity of the company covered by research analyst. It is confirmed that, Vaibhav Chowdhry (B.Com, MBA), research analyst and Pritesh Thakkar (MBA, B.Com), research associate, do not serve as an officer, director or employee of the companies mentioned in the report. 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