1. RETAIL RESEARCH Oct Wipro Ltd. – Q2FY15 Result Update 29, 2014
HDFC sec Scrip code Industry CMP (Rs.) Recommended Action Entry Price Band (Rs.)* Target (Rs.) Time Horizon
WIPLTDEQNR IT 554.1 Buy on dips 489-508 556 1 quarter
*Applicable till the next results are announced
In our Q1FY15 result review dated July 28, 2014, we recommended investors to buy Wipro on dips to Rs. 491-511 for a price target of Rs. 570 over the next quarter.
Thereafter, the stock touched a low of Rs. 535 on Aug 01, 2014 and subsequently touched a high of Rs. 621.5 on Oct 07, 2014. Currently it is quoting at Rs. 554.1.
Wipro’s Q2FY15 numbers were in line on the revenue front (in INR terms; growth in USD terms was below the street expectations, impacted by more than expected cross
currency headwinds), while profit growth was below our projections. Q3FY15 USD revenue growth guidance given by the company was marginally lower than our
expectations, considering strong deal wins over the last two quarters. Given below are some of the key highlights, which we came across while reviewing the results.
Key highlights of Q2FY15 results: (IT services and products)
 Consolidated net revenues (INR) for the quarter increased by 8.5% Y-o-Y and by 4.9% Q-o-Q to Rs. 116.84 bn. In dollar terms, the IT services revenues grew by 1.8% Q-o-
Q to USD 1771.5 mn, which was at the lower end of Q-o-Q growth guidance of 1.7% to 4% given in Q1FY15. However, in constant currency, the IT Services Revenues
grew by 3% Q-o-Q to USD 1793.1 mn which was within the guided range of USD 1770-1810 mn (though the growth was lower than its peers TCS, Infosys & HCL Tech).
In INR terms, the revenue growth was higher - supported by rupee depreciation during the quarter. IT services revenues in INR grew by 4%, while IT products revenues
grew by 19.5% Q-o-Q.
 Overall EBIT grew by 2.9% Y-o-Y, but declined by 3% Q-o-Q, while EBIT margins declined by 108 bps Y-o-Y & 161 bps Q-o-Q. The fall in margins was on account of full
impact of wage hikes and increased hiring. IT services business EBIT increased by 6.1% Y-o-Y & 0.1% Q-o-Q, while the EBIT margins declined by 50 bps Y-o-Y & 85 bps
Q-o-Q to 22%. However, the margins included profit on sale of a strategic investment during the quarter. Excluding this, the IT services EBIT margins stood at 21.4%,
down 109 bps Y-o-Y & 144 bps Q-o-Q. The IT products business EBIT declined by 59.2% Y-o-Y and 62.4% Q-o-Q, while EBIT margins declined by 94 bps Y-o-Y & 148 bps
Q-o-Q to 0.7%.
 PBT growth stood at 8% Y-o-Y & 0.2% Q-o-Q. Finance & Other income (net) grew by 49.5% Y-o-Y & 22.9% Q-o-Q. Effective tax rate declined by 5 bps Y-o-Y, but
increased by 161 bps Q-o-Q to 22.8%. Minority interest increased by 31.1% Y-o-Y, but declined by 8.8% Q-o-Q. PAT grew by 7.9% Y-o-Y, but declined by 0.9% Q-o-Q.
PAT margins declined by 9 bps Y-o-Y & 104 bps Q-o-Q to 17.8%. EPS for the quarter stood at Rs. 8.4 (on equity of Rs. 4935 mn) vs. Rs. 7.8 (on equity of Rs. 4930 mn) in
Q2FY14 and Rs. 8.5 in Q1FY15 (on equity of Rs. 4934 mn).
Quarter Financials: (Consolidated – IFRS – IT services & Products)
(Rs. in Million)
Year to March (Rs. In Million) Q2FY15 Q2FY14 VAR [%] Q1FY15 VAR [%]
Net Revenue 116838 107727 8.5 111358 4.9
Cost of Revenue 80866 74207 9.0 74941 7.9
Gross Profit 35972 33520 7.3 36417 -1.2
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2. S&M Expenses 7628 7605 0.3 7557 0.9
G&A Expenses 6605 5686 16.2 6187 6.8
Forex Gains / (Loss) 1323 2193 -39.7 1098 20.5
EBIT 23062 22422 2.9 23771 -3.0
Finance & Other Income (net of finance exp.) 4120 2756 49.5 3351 22.9
Profit before Tax 27182 25178 8.0 27122 0.2
Tax 6199 5754 7.7 5942 4.3
PAT [before min interest & affiliate profit / (loss)] 20983 19424 8.0 21180 -0.9
Minority Interest 135 103 31.1 148 -8.8
PAT [net of min interest & affiliate profit / (loss)] 20848 19321 7.9 21032 -0.9
EPS (Rs.) 8.4 7.8 7.8 8.5 -0.9
Equity Post Bonus (Rs.) 4935 4930 0.1 4934 0.0
Face Value (Rs.) 2 2 0.0 2 0.0
EBIT (%) 19.74 20.81 -5.2 21.35 -7.5
NPM (%) 17.84 17.94 -0.5 18.89 -5.5
(Source: Company, HDFC Sec)
Segment Results:
(Rs. in Million)
Particulars Q2FY15 Q2FY14 VAR [%] Q1FY15 VAR [%]
Revenue
IT Services 109235 100679 8.5 105083 4.0
IT Products 9152 9374 -2.4 7660 19.5
IT Services & Products 118387 110053 7.6 112743 5.0
Others (Reconciling Items) -226 -133 69.9 -287 -21.3
Total Revenues (including forex gain / loss) 118161 109920 7.5 112456 5.1
EBIT
IT Services 24023 22644 6.1 24003 0.1
IT Products 62 152 -59.2 165 -62.4
IT Services & Products 24085 22796 5.7 24168 -0.3
Others (Reconciling Items) -1023 -374 173.5 -397 157.7
Total EBIT 23062 22422 2.9 23771 -3.0
EBIT (%)
IT Services 22.0 22.5 -50 22.8 -85
IT Products 0.7 1.6 -94 2.2 -148
Global IT Services & Products 20.3 20.7 -37 21.4 -109
Others (Reconciling Items) - - - - -
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3. Total EBIT (%) 19.5 20.4 -88 21.1 -162
(Source: Company, HDFC Sec)
 Geographically, the revenue growth was driven by APAC & other Emerging markets and Americas, which grew by 6% & 4.3% Q-o-Q (in reported currency). Growth in
India & Middle East stood at 3.1% Q-o-Q. However, Europe disappointed, reporting de-growth of 4.3% Q-o-Q. In Constant currency, the APAC & other Emerging
markets, Americas and India & Middle East grew by 8.3%, 4.5% & 4.1% Q-o-Q respectively, while Europe de-grew by 1.7% Q-o-Q.
 Geography wise revenue distribution (IT Services):
Particulars Q2FY15 Q1FY15 Q2FY14
America 51.0% 49.8% 49.8%
Europe 27.8% 29.6% 28.0%
India & Middle East business 9.2% 9.1% 8.3%
APAC and other Emerging Markets 12.0% 11.5% 13.0%
 Customer Metrics & Relationships Data (IT services):
Q2FY15 Q1FY15 Q2FY14 Remarks
Revenue from Existing customers 98.6% 99.6% 99.1%
Number of new customers 50 35 45
The company added 50 new customers during the quarter. Globally it won contracts from clients
like CLK Enerji (Turkey's largest electricity distribution and retail sales company), Philip Morris
International, British Petroleum.
Total Number of active customers 1018 1022 942
Customer Concentration Growth was driven by non top 10 clients (up 2.2% Q-o-Q).
Top customer 3.5% 3.7% 3.8% Revenues from the top client de-grew by 3.7% Q-o-Q.
Top 5 12.9% 13.4% 13.9% Revenues from top five clients de-grew by 2% Q-o-Q.
Top 10 21.5% 21.8% 22.8% Revenues from top 10 clients grew by 0.4% Q-o-Q. Ramp-down of projects could have affected
growth in top & top 5 clients.
Customer Size Distribution (TTM)
> $100M 10 10 10
> $75M 15 14 15
> $50M 30 29 27
> $20M 85 84 78
> $10M 150 143 137
> $5M 225 224 220
> $3M 292 293 282
> $1M 524 511 487
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4.  Employee Metrics
Q2FY15 Q1FY15 Q2FY14 Remarks
Closing Head Count - IT Services 154297 147452 147216 There was net addition of 6,845 employees, which was the highest in the past few quarters.
This indicates healthy pipeline.
Utilization (IT Services excl BPO, IFOX
and India & Middle East)
Gross Utilization 70.0% 68.7% 66.1% Gross utilization levels improved both on Y-o-Y & Q-o-Q basis. Despite an improvement, the
utilization rate is below the peers.
Net Utilization (excl Support) 77.5% 76.0% 73.0%
Net Utilization (Excluding Trainees) 79.4% 77.9% 74.3% The Net Utilization improved by 150 bps Q-o-Q & 510 bps Y-o-Y.
Attrition
IT Services excl BPO and India & Middle
East
Voluntary TTM 16.5% 16.1% 13.5% The attrition continues to remain high, which is a concern. This was the fifth straight quarter
of increase in attrition rate.
Voluntary Quarterly Annualized 16.9% 17.0% 15.4%
BPO %- Quarterly 12.0% 11.8% 12.1% BPO attrition increased marginally on Q-o-Q basis.
BPO % - Post Training 10.0% 10.1% 9.0%
Sales & Support Staff - IT Serv. (avg.) 11,328 11,174 11,328
 Among the verticals, the revenue growth was driven by Energy, Natural Resources & Utilities and Healthcare Life Sciences and services, which grew by 6.9% & 5.7% Q-o-
Q. Manufacturing & Hi-tech and Retail, Consumer Goods and transportation grew marginally by 1.9% & 1.1% Q-o-Q. However, Finance Solutions and Global Media &
Telecom disappointed, de-growing by 0.9% & 1.3% Q-o-Q respectively.
 Among the service offerings, the growth was driven by Global Infrastructure Services, Consulting and R&D business, up 8.1%, 4.5% & 4% Q-o-Q respectively. Advance
Technologies & Solutions, Business Application Services & Product Engineering Services grew by 3.1%, 3% & 2% Q-o-Q respectively. However, ADM & BPO
disappointed, declining by 7.1% & 3.5% Q-o-Q respectively. Wipro’s Infrastructure Managed Services (IMS) unit is showing acceleration in growth, which is
encouraging. IMS revenues have grown by 4.7% CQGR over the past five quarters and now accounts for 26.8% of revenues.
 Vertical Composition (%)
Verticals Q2FY15 Q1FY15
Global Media & Telecom 13.9% 14.3%
Finance Solutions 26.0% 26.7%
Manufacturing & Hi-Tech 18.2% 18.2%
Healthcare, Life Sciences & Services 11.2% 10.8%
Retail & Transportation 13.9% 14.0%
Energy & Utilities 16.8% 16.0%
 Value added services composition (%)
Practices Q2FY15 Q1FY15
Global Infrastructure Services 26.8% 25.3%
Advanced Technologies & Solutions 11.5% 11.3%
Business Application Services 29.1% 28.7%
BPO 9.2% 9.7%
Product Engineering & Mobility 7.0% 7.0%
ADM 16.4% 18.0%
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5. Other highlights:
 The Company expects Revenues from IT Services to grow in the range of 2.1-4% Q-o-Q to USD 1808 - 1842 mn for the quarter ended Dec 31, 2014. Guidance is based
on the following exchange rates: GBP/USD at 1.65, Euro/USD at 1.31, AUD/USD at 0.92, USD/INR at 60.76 and USD/CAD at 1.10. Considering strong deal wins over the
last two quarters, the guidance was lower than our & the street expectations. As per the management, H2FY15 will be better than H1FY15. It expects the execution at
the clients end to pick up over the next few quarters. Margins are expected to remain stable at current levels.
 During the quarter, Wipro completed the transaction announced on July 18, 2014 with ATCO Limited and the financials of the entities taken over were consolidated
from August 2014.
 Wipro sees immense opportunity in Digital field. Wipro Digital has been chosen to partner in the digital transformation journey of a leading UK insurance firm, which is
poised to re-imagine all aspects of its Life Insurance customer proposition, from engagement to servicing to product innovation. As a partner of choice, Wipro will
establish a digital capability which offers a broad based human-centric design proposition, with an architecture directly focused on addressing core customer needs.
 While the industry landscape is still undergoing change, Wipro sees multiple opportunity spaces for growth and gaining market share. It continues to execute to its
stated strategy of leveraging platforms for non-linear growth and creating differentiated solutions around the new technology paradigms.
 In Q2, the company continued to build on leadership position in Infrastructure Services and continued the momentum of deal wins.
 The company is seeing positive sentiment in India with the confidence that the Government is focused on driving an agenda of growth.
 The company stated that business leaders in the US continue to exhibit increased confidence on growth prospects. US based clients are increasingly looking to drive
business value from their technology investments.
Summary
Wipro’s Q2FY15 numbers were in line on the revenue front (in INR terms; growth in USD terms was below the street expectations, impacted by more than expected cross
currency headwinds), while profit growth was below our projections. Q3FY15 USD revenue growth guidance given by the company was marginally lower than our
expectations, considering strong deal wins over the last two quarters.
While the improvement in utilization levels, robust growth from India & Middle East and APAC & other Emerging markets and robust growth in IMS was encouraging, we
were disappointed with margin decline despite improvement in utilization levels and favourable impact of rupee depreciation and offshore shift. The decline was led by
full impact of wage hikes and increased hiring. We were also disappointed with de-growth in Europe (possibly due to delay in execution at the clients end), rise in attrition
rate and de-growth in a few service offerings. It lagged its nearest peers TCS, Infosys & HCL Technologies in constant currency Q-o-Q revenue growth.
While the management expects the recovery in execution in the coming quarters, we would closely monitor the same. We expect H2FY15 to be better than H1 likely to
be driven by strong wins and healthy deal pipeline. Further a pickup in tech spending in the domestic IT market could aid revenue growth in H2FY15. Healthcare and E&U
are the only two verticals, which have consistently driven Wipro’s growth over the last few quarters. For better revenue visibility it is essential that growth in other
verticals pick up. Wage hikes and increased hiring could continue to put pressure on margins, though it would be partly offset by improvement in utilization levels.
Sluggishness in commodity based clients has affected the growth for Wipro in the 1st half. It will be interesting to see how soon these clients return to their normal IT
spends. Wipro’s continued modest guidance could be a sign of it facing execution issues or it losing part of its existing business to competitors. The strong deal wins in
H1FY15 are expected to contribute significantly from Q4, perhaps prompting the management to guide for a stronger H2 than H1, despite modest Q3 guidance.
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6. We feel Wipro could meet our revenue estimates for FY15 & FY16. Hence we are keeping the same unchanged. However, we feel the company could disappoint on the
profit front on the back of lower than expected margins. Hence we are downgrading the operating profit & PAT estimates by 3.4% & 1.4% respectively for FY15 & by 3.3%
& 2.4% respectively for FY16. Accordingly, revised EPS for FY15 & FY16 is estimated at Rs. 34.8 & Rs. 38.4 respectively.
At CMP of Rs. 554.1, the stock is trading at 14.4xFY16E EPS, which is at a discount of ~26% to TCS & ~11% to Infosys. The discount to TCS is justified considering its
relatively lower margins and lower success in driving incremental growth. Valuing the stock at 14.5xFY16E EPS, we arrive at a price target of Rs. 556. The stock is fairly
valued at current levels. We feel investors can buy the stock only on dips to Rs. 489-508 (12.75-13.25xFY16E EPS) for decent returns over the next quarter. For better
valuations, Wipro should display strong performance both on revenue & profit front and impress the street in the coming quarters.
Financial Estimates: (IFRS – Consolidated – IT services & products)
(Rs. in Million)
Particulars FY12 FY13 FY14 FY15 (OE)* FY15 (RE)* FY16 (OE) FY16 (RE)
Net Revenue 318747 374256 434269 472398 472398 517276 517276
EBIT 59912 69972 89354 99782 96369 110697 107076
PAT 52325 61347 77967 87154 85976 96989 94662
EPS (Rs.) 21.3 24.9 31.6 35.3 34.8 39.3 38.4
EBITM (%) 18.8 18.7 20.6 21.1 20.4 21.4 20.7
PATM (%) 16.4 16.4 18.0 18.4 18.2 18.8 18.3
PE 26.0 22.2 17.5 15.7 15.9 14.1 14.4
* OE = Original Estimate; RE = Revised Estimate (Source: Company, HDFC Sec Estimates)
Analyst: Mehernosh K. Panthaki – IT, FMCG & Midcaps; Email ID: mehernosh.panthaki@hdfcsec.com
RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office
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