Wipro stock rises 8% on back of $1.5 billion deal from Alight Solutions

Stock's underperformance, discount to peers expected to ease as software major catches up on revenue growth

The Wipro stock gained as much as 8.5 per cent intra-day on Monday, its highest such gain in five years. This was after the company announced on Sunday that it had bagged its largest order, worth $1.5 billion (Rs 106 billion) from US-based Alight Solutions. The 10-year order would translate to an incremental $150 million (Rs 10.6 billion) annually over the contract period. This is two per cent of the current revenue.

Wipro will offer digital solutions for Alight’s operations, including segments of health, wealth, cloud HR and finance. The deal comes barely a month after Wipro had bought Alight Solution India’s captive unit, Alight HR Services India, for $117 million.

Analysts say they were building in a  five per cent revenue growth for Wipro in FY19. As contribution from the deal will come in the second half, there will be a one percentage point addition to revenue growth in the current financial year and two from FY20. Analysts at HDFC Securities say with large deal wins and recovery in stressed verticals, the third quarter’s growth forecast would be in line with the sector’s growth rate.

The software services major has been doing well in the financial vertical (30 per cent of revenue) while improving  contribution of digital services (28 per cent in the June 2018 quarter versus 22.5 per cent a year before). Yet, what the Street will look for is improvement in the laggard segments of health care and telecom. While the former was impacted due to US regulations, telecom services were hit by client bankruptcies.

Analysts say the HPS or HealthPlan Services business (health insurance) has been on a declining trend and things should turn around for this by the December quarter. The Street will also look at signs of an improvement in margins, which fell 90 basis points to 14.3 per cent in the second quarter. Margins could improve, given that the headwinds were largely on account of HPS and restructuring in the India and West Asia business.

The positive for Wipro. which would aid its revenue, is depreciation of the rupee against the dollar. Analysts at PhillipCapital believe a four per cent fall in the rupee will lead to a four to five per cent increase in earnings per share for most companies. The Street has already factored in some of the weakness in the rupee. More, with the dollar strengthening against other currencies and crude oil prices moving up, there could be more weakness for the Indian currency. This would positively rub off on Wipro.

The company has been underperforming peers on revenue growth over the past four years and this has been reflected in its valuation, at a 15 per cent discount to peers. While the deal win is a positive, analysts believe the stock’s re-rating will be gradual and contingent on an improved graph of revenue growth and margins.

At the current price, the stock (it ended the day with a gain of 2.5 per cent) is trading at 15 times its FY19 earnings estimate. Investors could take exposure to it with a two to three-year view.