WIT - Wipro Gains Large Clients Despite Tough Demand Environment

2023-10-31 15:52:42 ET

Summary

• Wipro Limited is facing challenges in the IT consulting industry as clients prioritize cost optimization projects over discretionary IT spending.
• The company is experiencing significant growth in large deal sizes, but overall revenue has fallen year-over-year.
• Wipro Limited stock may be fully valued, and my outlook remains Hold for the near term.

A Quick Take On Wipro

Wipro Limited ( WIT ) provides a wide array of digital transformation consulting, outsourced business services and IT products in India and worldwide.

I previously wrote about Wipro with a Hold rating.

The firm is navigating a challenging environment in the overall IT consulting industry as clients reduce their discretionary IT project spending and focus on cost takeout and optimization projects.

However, WIT is producing significant growth in large deal sizes, so my outlook for Wipro Limited remains Hold for the near term.

Wipro Overview And Market

India-based Wipro provides various IT consulting services, business outsourcing services and IT products to organizations globally.

The firm is led by Chief Executive Officer Thierry Delaporte, who was previously Chief Operating Officer of Capgemini and currently lives in Paris, France.

The company’s main service offerings include:

• IT consulting

• Business process outsourcing

• Product engineering & design

• Government services

• Other services.

Wipro has more than 250,000 employees located on six continents.

According to a 2023 market research report by Precedence Research, the worldwide market for IT consulting was estimated at $276 billion in 2022 and is forecasted to reach $902 billion by 2032.

This represents a forecast CAGR (Compound Annual Growth Rate) of 12.58% from 2023 to 2032.

The primary reasons for this expected growth are an increasing preference for the digitization of business processes across every industry in order to increase efficiency and support revenue growth.

The chart below shows the software consulting market trajectory forecast through 2032:

Major competitive or other industry participants include:

• Accenture

• Atos SE

• Capgemini

• CGI Group

• Clearfind

• Cognizant

• Deloitte Touche Tohmatsu

• Ernst & Young

• Infosys

• International Business Machines Corp.

• Oracle Corp.

• PricewaterhouseCoopers

• Rapport IT

• SAP SE

• Others.

Wipro’s Recent Financial Trends

Total revenue by quarter has fallen year-over-year; Operating income by quarter has trended lower in recent quarters:

Gross profit margin by quarter has risen slightly; Selling and G&A expenses as a percentage of total revenue by quarter have been trending slightly higher in recent quarters:

Earnings per share (Diluted) have varied within a narrow range:

(All data in the above charts is GAAP.)

In the past 12 months, WIT’s stock price has fallen 2.77% vs. that of Infosys Limited’s ( INFY ) drop of 12.01%:

For balance sheet results, the firm ended the quarter with $4.06 billion in cash, equivalents and short-term investments and $1.9 billion in total debt, of which $1.1 billion was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $1.76 billion, during which capital expenditures were $124 million. The company paid $54.0 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Wipro

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and free cash flow:

Based on the DCF, the firm’s shares would be valued at approximately $4.25 versus the current price of $4.58, indicating they are potentially currently fully valued.

As a reference, a relevant partial public comparable would be Infosys:

(Source - Seeking Alpha.)

Sentiment Analysis

The chart below shows the frequency of various keywords used during management’s most recent earnings conference call with analysts:

The chart shows the firm is continuing to experience macroeconomic headwinds and challenges with client spending.

Analysts questioned management about its growth strategy, sales and marketing investments and aspects of the financial services vertical.

Leadership replied that it is seeing increasing win rates and pipeline quality in the U.S. Overall, it expects rebounding growth as the market improves.

On the topic of its sales and marketing efforts, it has increased its focus on larger deals that have been interested in cost takeout and optimization engagements.

Its moderated growth in the number of new clients is a byproduct of focus on larger deals that take more time to close.

Regarding the financial services client vertical, the firm is seeing slowing financial services industry revenue in Europe, although the pipeline there is improving. Management is expecting a rebound in the sector as cost reduction processes are completed and demand returns over time.

Commentary On Wipro

In its last earnings call (Source - Seeking Alpha ), covering FQ2 2024’s results , management’s prepared remarks highlighted a strong quarter for bookings, 79% higher than the previous year’s results for FQ2.

Notably, the firm has doubled the number of accounts with greater than $100 million, from 11 to 22.

So, management believes the firm is "winning in the market against a backdrop of economic weakness."

However, its European region, which has been a driver of growth in previous periods, has seen a decline of 5% YoY due to "slowing demand and reprioritization of spend."

Total revenue for FQ2 2024 fell by 2.0% year-over-year, while gross profit margin increased by 2.0%.

Selling and G&A expenses as a percentage of revenue rose by 0.7% YoY, and operating income grew by 7.0%.

The company's financial position is reasonably good, with ample liquidity, some debt and very strong free cash flow.

However, a significant portion of the firm’s debt is due within 12 months, so it may face increasing debt service costs as it refinances its current debt at higher interest rates.

Looking ahead, fiscal 2024 consensus revenue estimates indicate a potential decline of 2.3% versus fiscal 2023.

If achieved, this would represent a swing to a revenue decline rate versus fiscal 2023’s growth rate of 5.15% over fiscal 2022.

My discounted cash flow calculation suggests that the stock may be fully valued at its current level based on free cash flow generation.

Also, the stock is being valued at lower metrics than competitor Infosys, likely due to materially lower net income margin results.

Given the difficult environment the firm is navigating in the overall IT consulting industry as clients reduce their discretionary IT project spending and focus on "must have" engagements, my outlook for Wipro remains Hold for the near term.

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