Is bet on big data going to be even bigger? April 23, 2014 Shashi Bhusan shashibhusan@plindia.com +91 22 66322300 Hussain Kagzi hussainkagzi@plindia.com +91 22 66322242 Rating BUY Price Rs531 Target Price Rs680 Implied Upside 28.1% Sensex 22,758 Nifty 6,815 (Prices as on April 23, 2014) Trading data Market Cap. (Rs bn) 1,302.0 Shares o/s (m) 2,454.0 3M Avg. Daily value (Rs m) 2074.6 Major shareholders Promoters 73.51% Foreign 8.82% Domestic Inst. 4.68% Public & Other 12.99% Stock Performance (%) 1M 6M 12M Absolute (6.9) 3.1 56.3 Relative (11.5) (6.0) 37.6 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2015 36.5 36.3 0.7 2016 41.9 40.7 2.9 Price Performance (RIC:WIPR.BO, BB:WPRO IN) (Rs) 700 600 500 400 300 200 100 0 Apr 13 Jun 13 Aug 13 Source: Bloomberg Oct 13 Dec 13 Feb 14 Apr 14 Wipro s Analytics and Information Management service has been growing ahead of the group s revenue. The company has recently made some key changes in the service line that indicates their increasing bet on the service line. We see these strategic moves as a precursor to completely acquiring Opera. We retain BUY. Series of events related to Analytics service offerings: There had been some key developments in the services line. 1) Merged analytics business with the advanced technologies and created a new business division to focus on newer technologies. Mr. Heenan Jalil will head merged entity. 2) Named Mr. KR Sanjiv, who was heading the analytics business, as its new CTO. 3) Raised stake in Opera Solutions to 12.5% (Acquired a 6.5% stake in Opera Solutions in May 2013 for ~$30mn). 4) Mr. Sridhar Ramasubbu (CFO, International Business) moved to Opera after his ~25 years stint with Wipro. More about Opera Solution: Established in 2004 by CEO Mr. Arnab Gupta, Opera Solutions is a Business Intelligence/Big Data Solution company. It helps clients to develop insights and recommends actions to make decisions, work more productively, serve their customers better, grow revenues, and reduce expenses. Its hosted solutions (SaaS) have clients in financial services, healthcare, hospitality, telecommunications, and government. It is headquartered in Jersey City, NJ (USA), with offices in NA, Europe, and Asia. Opera Employees, Valuation and Financials: The firm has 700 employees from over 30 countries, including 200 with advanced degree. On September 14, 2011, Opera Solutions raised US$84mn in capital from Silver Lake Sumeru, Accel KKR, Invus Financial Advisors, JGE Capital Management, and Tola Capital. The company has revenue of ~US$100mn. Valuation & Recommendation: Wipro has been more acquisitive compared to peers. We believe acquisition of Opera Solution would give Wipro s Business Analytics service much needed impetus and will put offerings ahead of peers. We continue to retain our preference for Wipro over peers. Reiterate BUY with target price of Rs 680, 16x FY16E earnings estimates. Key financials (Y/e March) 2013 2014 2015E 2016E Revenues (Rs m) 374,256 436,830 488,922 545,933 Growth (%) 17.4 16.7 11.9 11.7 EBITDA (Rs m) 78,181 99,660 112,166 126,019 PAT (Rs m) 61,684 80,903 89,969 103,294 EPS (Rs) 25.0 32.8 36.5 41.9 Growth (%) 17.1 31.2 11.2 14.8 Net DPS (Rs) 6.9 9.0 9.0 9.0 Profitability & Valuation 2013 2014 2015E 2016E EBITDA margin (%) 20.9 22.8 22.9 23.1 RoE (%) 21.7 25.8 23.9 22.9 RoCE (%) 20.5 25.4 23.6 22.6 EV / sales (x) 3.3 2.7 2.3 1.9 EV / EBITDA (x) 15.6 11.9 10.0 8.3 PE (x) 21.2 16.2 14.5 12.7 P / BV (x) 4.6 3.8 3.2 2.7 Net dividend yield (%) 1.3 1.7 1.7 1.7 Source: Company Data; PL Research Company Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Wipro Analytics & Information Management: Growing steadily 16.0% Analytics & Info. Mngmt (USD QoQ gr.) Analytics (% revs) (RHS) 8.0% 10.0% 6.5% 4.0% 2.0% 5.0% Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Source: Company Data, PL Research Exhibit 2: Strong growth expected in Analytics Exhibit 3: Wipro s Acquisitions over last seven years Source: NASSCOM, Accenture, PL Research Year Company Sector Country Price Desciption FY08 Infocrossing Healthcare USA This acquisition created one of the world leaders in end to end IT infrastructure ~US$600M management solutions. FY08 OKI Techno Hi Tech Singapore ~US$2.5M This acquisition facilitated a strategic partnership in the area of design services for the semiconductor market. Citi CTS is an India based captive provider of information technology services and solutions to FY09 Technology Services Banking India ~US$127m Citi Group worldwide. The acquisition is expected to enhance Wipro s capabilities to address Technology Infrastructure Services business in the financial service FY12 SAIC Energy & Utility USA Rs7,536m Acquired 100% SC of SAIC Europe, Gulf and India. Significant domain capabilities in the areas of digital oil field, petro technical data management and petroleum application services, addressing the upstream segment. FY13 VIT Consultancy BFS India Rs207mn The acquisition will further strengthen Wipro s presence in the banking domain FY13 AIT Software Services BFS Singapore Rs318m Outsourcing Services FY13 Promax Applications Retail CPG Australia AUD35m Has product and services around Trade Promotion Management, Forecasting & Volume Planning, Customer Account Planning & Budget and Modelling & Optimization solutions. FY14 Opus CMC BFS USA US$75m Mortgage solutions and outsourcing business and complement its existing offerings in mortgage solutions and outsourcing business and in mortgage origination, servicing and secondary market. Source: Company Data, PL Research April 23, 2014 2
Exhibit 4: Big Data Opportunity Analytics to growth at CAGR of ~50% (2012 17E) XaaS Professional Services Analytic & Transactional NoSQL Database SQL Database Infrastructure Networking Storage Compute 50.00 40.00 30.00 20.00 10.00 2011 2012 2013E 2014E 2015E 2016E 2017E Source: Wikbon Big Data Model, PL Research Exhibit 5: Majority use data analytics, but extent varies Source: TechRepublic, PL Research, Survey of 1,300 professionals worldwide April 23, 2014 3
Exhibit 6: Revenue and customers top data analytics/big data priority list Source: TechRepublic, PL Research, Survey of 1,300 professionals worldwide April 23, 2014 4
Income Statement (Rs m) Net Revenue 374,256 436,830 488,922 545,933 Raw Material Expenses 260,665 295,489 331,109 368,524 Gross Profit 113,591 141,341 157,814 177,409 Employee Cost Other Expenses 35,410 41,681 45,647 51,390 EBITDA 78,181 99,660 112,166 126,019 Depr. & Amortization 10,835 11,106 12,946 13,125 Net Interest 52 Other Income 11,250 15,012 16,380 19,662 Profit before Tax 78,596 103,514 115,601 132,556 Total Tax 16,912 22,601 25,432 29,162 Profit after Tax 61,684 80,913 90,169 103,394 Ex Od items / Min. Int. 62 200 100 Adj. PAT 61,684 80,903 89,969 103,294 Avg. Shares O/S (m) 2,463.0 2,463.0 2,463.0 2,463.0 EPS (Rs.) 25.0 32.8 36.5 41.9 Cash Flow Abstract (Rs m) C/F from Operations 70,422 72,741 96,699 112,236 C/F from Investing (53,410) (13,105) (14,668) (16,378) C/F from Financing (9,840) (22,093) (22,093) (22,093) Inc. / Dec. in Cash 7,172 37,543 59,938 73,765 Opening Cash 77,666 84,838 122,381 182,319 Closing Cash 84,838 122,381 182,319 256,084 FCFF 109,865 59,838 82,031 95,858 FCFE 88,209 59,838 82,031 95,858 Key Financial Metrics Growth Revenue (%) 17.4 16.7 11.9 11.7 EBITDA (%) 17.2 27.5 12.5 12.4 PAT (%) 17.3 31.2 11.2 14.8 EPS (%) 17.1 31.2 11.2 14.8 Profitability EBITDA Margin (%) 20.9 22.8 22.9 23.1 PAT Margin (%) 16.5 18.5 18.4 18.9 RoCE (%) 20.5 25.4 23.6 22.6 RoE (%) 21.7 25.8 23.9 22.9 Balance Sheet Net Debt : Equity (0.3) (0.4) (0.4) (0.5) Net Wrkng Cap. (days) (2) 5 7 6 Valuation PER (x) 21.2 16.2 14.5 12.7 P / B (x) 4.6 3.8 3.2 2.7 EV / EBITDA (x) 15.6 11.9 10.0 8.3 EV / Sales (x) 3.3 2.7 2.3 1.9 Earnings Quality Eff. Tax Rate 21.5 21.8 22.0 22.0 Other Inc / PBT 14.3 14.5 14.2 14.8 Eff. Depr. Rate (%) 10.7 9.7 10.0 9.0 FCFE / PAT 143.0 74.0 91.2 92.8 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 283,812 342,622 410,497 491,697 Total Debt 854 854 854 854 Other Liabilities 10,324 10,324 10,324 10,324 Total Liabilities 294,990 353,800 421,675 502,875 Net Fixed Assets 50,525 46,789 48,511 51,764 Goodwill 56,470 56,470 56,470 56,470 Investments 69,222 69,222 69,222 69,222 Net Current Assets 86,084 142,694 208,847 286,795 Cash & Equivalents 84,838 122,381 182,319 256,084 Other Current Assets 145,986 166,992 189,223 210,934 Current Liabilities 144,740 146,679 162,695 180,223 Other Assets 32,689 38,625 38,625 38,625 Total Assets 294,990 353,800 421,675 502,875 Quarterly Financials (Rs m) Y/e March Q1FY14 Q2FY14 Q3FY14 Q4FY14 Net Revenue 97,529 110,053 112,713 116,535 EBITDA 20,387 25,170 25,923 28,180 % of revenue 20.9 22.9 23.0 24.2 Depr. & Amortization 2,502 2,615 3,109 2,880 Net Interest Other Income 2,918 4,949 3,518 3,627 Profit before Tax 20,803 27,504 26,332 28,927 Total Tax 4,251 5,754 6,060 6,536 Profit after Tax 16,468 21,647 20,397 22,391 Adj. PAT 16,468 21,647 20,397 22,391 Key Operating Metrics IT Svcs Revs ($ mn) 689,616 744,785 811,816 884,879 Pricing (US$ / Hr) 38.8 39.2 39.6 40.0 Currency (USDINR) 54.5 60.3 59.8 59.0 Sw. Devp. Cost (% of Sales) 69.6 67.6 67.7 67.5 SG&A (% of Sales) 9.5 9.5 9.3 9.4 Revenue (US$ m) 6,865 7,238 8,183 9,253 EBITDA Margin Expansion/(Erosion) (bps) (4.0) 192.5 12.7 14.2 Tax Rate (%) 21.5 21.8 22.0 22.0 Source: Company Data, PL Research. April 23, 2014 5
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai 400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage % of Total Coverage 60% 50% 40% 30% 20% 10% 0% 53.6% 25.0% 20.5% 0.9% BUY Accumulate Reduce Sell PL s Recommendation Nomenclature BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. We may from time to time solicit or perform investment banking or other services for any company mentioned in this document. April 23, 2014 6