Buy Wipro, target Rs 390: Sharekhan

Sharekhan has a buy call on Wipro with a target price of Rs 390.

The current market price of Wipro is Rs 310.05.

Time period given by the brokerage is one year when Wipro price can reach defined target.


View of the brokerage on the company:
Good quarter: Wipro delivered better-than-expected revenue performance in Q2FY2019, with a constant currency (CC) revenue growth of 2.8 per cent q-o-q (at the upper end of revenue guidance of) and 5.1 per cent y-o-y. The growth was driven by its continued impressive performance in the BFSI segment (4.4 per cent q-o-q and 16 per cent y-o-y in CC) and consumer business verticals (4.8 per cent q-o-q CC). On a reported basis, USD revenue declined by 0.7 per cent q-o-q to $2,041.2 million, ahead of our estimates. Adjusted EBIT margin (excluding the loss incurred from settlement with one of its customers) for IT services stood at 18.1 per cent, above our estimates, an improvement of 250 bps q-o-q led by rupee tailwind (70 bps) and operational efficiencies. On a reported basis, the EBIT margin for IT services stood at 14.6 per cent. The reported net income during the quarter declined by 10.9 per cent q-o-q to Rs 1,888.9 crore. Adjusted net income (excluding the loss incurred from settlement with the customer in Q2FY2019 and the proceeds from the sale of data center business in Q1FY2019) grew by 28.5 per cent q-o-q.

Expect healthcare business to bounce back in next 2-3 quarters: Though Wipro continues face headwinds in its HPS (which is a substantial portion of its healthcare revenues, down $130 million on annual basis) owing to legislative uncertainty over the Affordable Care Act, the management has taken a wait-and-watch approach as new open enrollments are expected to begin in November. Pick-up in enrollment would help its HPS business to bounce back. Further, the management mentioned that it witnessing some initial sign of success after it has started investing in adjacent areas in the healthcare domain. The management remains hopeful that the healthcare vertical growth would bounce back in next 2-3 quarters.

Q3 guidance indicates initial signs of stabilization: Wipro guidance is on the expected lines at 1-3 per cent q-o-q (adjusting for India PSU and India Government business in Q2FY2019), indicating some initial signs of progress to narrow the gap in revenue growth rate with the large competitors post soft performance in last couple of quarters due to insolvency of customers and restructuring activities in certain pockets. Q3 is usually a weak quarter for Indian IT companies due to furloughs and lower working days. The financial vertical continues to report impressive performance of 4.4 per cent q-o-q in Q2FY19, which is expected to continue with the improving demand environment in the US on account of its diversified customer portfolio in banking, capital market and insurance. Energy & utilities vertical growth has bounced back during this quarter, while the management sees good traction in communication vertical led by higher core enterprise spending and roll out of 5G in coming quarters. The localization initiative is progressing well (around 60 per cent localized in US), which would fulfill the requirement of new visa regime.

Maintain Buy: We have broadly maintained our earnings estimates for FY2019E/FY2020E/FY2021E. Receding headwinds in healthcare, increasing deal wins, focusing on client mining and restructuring initiatives are expected to translate into decent growth over the next two years. The stock is currently trading at 14x its FY2020 EPS estimates, which is a discount to TCS/Infosys, while earnings CAGR is expected to be similar to Infosys over FY2019-FY2021E. Thus, we maintain our Buy rating on Wipro with the unchanged price target (PT) of Rs 390.