Weak quarter on revenue growth; EBIT margin delivers a positive surprise

Wipro reported sequential revenue decline of 0.7% and grew 5.9% yoy on constant-currency (c/c) basis. On expected lines, revenues from financial services declined 0.6% qoq in c/c. Consumer business revenue declined 4.4% qoq, health by 1.5% and manufacturing by 2%. EBIT margin at 18.4% (50+ bps yoy, -80 bps qoq) was 90 bps higher than our estimate and helped to the extent of 40 bps from profit on sale of Workday and fair value on callable units pertaining to achievement of business targets for the data centre business sold in FY2019.

Net profit of Rs 23.9 bn grew 12.6% yoy and was ahead of our estimate; the outperformance was aided by higher-than-expected other income and lower-than-expected tax rate.

Weak September quarter guidance highlights slowing financial services and soft spots Revenue growth guidance of 0-2% in c/c for the September 2019 quarter (2.5-4.6% on yoy comparison) was below our expectation. Wipro has high exposure to the impacted segments of financial services, viz. capital markets and European banks. Expect FY2020E to be another year of disappointment in revenue growth; in fact, revenue growth could be lower than underlying revenue growth of FY2019.

Stock trades at full valuations; cut FY2020-22E EPS estimates by 4-7%

We incorporate the recent quarter disappointment and cut FY2020-22E revenue estimates by 0-3%. We are also moderating our EBIT margin assumption on the back of revised INR/USD rate of KIE economists and moderation in revenue growth assumption. Net result is 4-7% cut in FY2020-22E EPS.

Even as Wipro has made progress in several areas such as large account management, strength in select digital competencies, and focused and directed bets, the overall progress is slow, resulting in continuing underperformance in growth. Valuations at 15X FY2021E earnings are full for a business that will continue to underperform and report anaemic growth.