Stock Update Wipro
Reco: Hold
PT: Rs630
CMP: Rs547
Soft growth momentum; maintain Hold with revised PT of Rs630 Key points - Muted quarter: For Q3FY2016, IT services revenues were broadly in line at $1,838.3 million, up 1.4% on a constant-currency basis (closer to mid level of restated currency guidance range of $1,821-1,858 million), and on a reported basis it was up by 0.4% QoQ. The EBIT margin was down by 50BPS QoQ to 20.2%, owing to lower utilisation and some effect of Chennai flood. The total consolidated revenues were up by 2.8% QoQ to Rs12,860.5 crore. The net income for the quarter remained muted QoQ at Rs2,234.1 crore vs Rs2,235.4 crore in Q2FY2016. On operating metric front, top client was up by 3.6% QoQ, after a 4.1% decline in Q2FY2016. During the quarter, the company won six new large deals and seven in digital space. On the vertical side, healthcare, life sciences & services continue to show strong momentum, up by 5.2% QoQ, energy vertical continues to slide down by 1.7% QoQ. Wipro added 39 customers and net headcounts were up by 2,268 to 170,664, while quarterly annualised voluntary attrition remained stable at 16.3% against 16.8% in Q2FY2016.
- Weak organic guidance, optimistic commentary: (1) For Q4FY2016, the management guided for 2-4% sequential growth to $1,875-1,912 million, including the recent acquisition of Cellent AG. On an organic basis, it will be around 0.7-2.7% QoQ, which seems lacklustre; (2) CEO designated Abid Ali Neemuchwala has stated three top priorities for the next one year; a) strengthening sales team/front-end, b) consulting transformation, more clients focus, c) focus on industrialisation of service delivery through platforms like Holmes (AI platform) and automation; d) new unit MIT (marketing, innovations and technology), which will focus on strategically developing IPs and also look at monetisation of exiting platforms and IPs; (3) Expect IT budget for CY2016 to be flat to negative; (4) Large deals are coming with higher pricing pressure, to run the business, budget is getting cut from client side; and (5) More spending in the digital space.
- Maintain Hold with a revised price target of Rs630: Wipro continued its soft earnings momentum, and expect to be, once again, at the bottom of the quadrant among the peers in FY2016. Further, we do not expect material improvement in organic revenue performance even in FY2017, owing to portfolio challenges and weak client mining. We have tweaked our earnings estimates for FY2016 and FY2017 and also introduced FY2018 estimates in this note. Though, at current levels, the stock trades at reasonable valuation of 13.4x and 12.1x based on its FY2017 and FY2018 earnings estimates, respectively, we do not see any supporting re-rating trigger for the stock in medium term. Thus, we have maintained our Hold rating on the stock with a revised price target of Rs630.
LIC Housing Finance
Reco: Buy
PT: Rs558
CMP: Rs463
Margins continue to improve; maintain Buy Key points - NII up 36.2% YoY aided by margin uptick: LIC Housing Finance Ltd (LICHFL) reported a healthy set of numbers for Q3FY2016 as net profit grew by 21.7% YoY. The operating performance remained strong as net interest income grew by 36.2% YoY, though higher opex (up 37.6% YoY) and rise in provisions (up 406% on a low base of Q3FY2015) to an extent affected growth in profit. The net interest margin improved both sequentially and YoY to 2.58% supported by consistent decline in borrowing cost (down 41BPS to 9.18 %), increase in proportion of high yielding loans and re-pricing of loans (fixed to floating rates). The reported spreads also improved to 2.10% vs 1.54% in Q3FY2015.
- Loan growth steady, asset quality holds: Overall, loan book registered a growth of 15.2% YoY with individual book growing by 15% and 20% growth in developer book. However, the overall disbursements growth moderated sequentially (10.3% vs 16.6% in Q2FY2016) while repayment rates increased slightly which affected loan book growth. The management expects disbursements to pick up in Q4FY2016 (targeting 15% disbursement growth for FY2016). Asset quality improved marginally on a Q-o-Q basis (gross NPAs in individual loan book at 0.58 %) and remained among the best in system. The provision coverage ratio (PCR) improved to 116%.
- Valuations: LICHFL continues to report strong performance at operating level, thanks to increase in margins. The company is among the key players in housing finance sector and has seen steady business growth despite the competition. We believe, increase in the proportion of non-individual loans and revival in mortgages will drive growth in earnings. We expect earnings to grow at a CAGR of 19.9% over FY2015-17 resulting in an RoA of 1.5%. We have maintained our Buy rating on the stock with a price target of Rs558.
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