Wipro (WIT, Financial), with current market capitalization of $31 billion, is one of India’s largest IT outsourcing companies. Over the years, Wipro has been a value creator for investors, and it is likely to deliver stellar returns in the next three to five years.
On March 28, Wipro announced that the company has signed a multiyear contract with Jubilant FoodWorks (NSE:JUBLFOOD, Financial) to deliver energy management services and help Jubilant reduce its energy and operational costs. With over 1,000 restaurants in India, the five-year agreement with Jubilant FoodWorks provides good revenue visibility.
However, I am looking beyond this agreement. Energy shortage and energy costs are significant in India, and Wipro’s solution is likely to attract a larger number of clients in the years ahead. Therefore, the EcoEnergy business segment for Wipro is likely to be a major revenue and earnings growth driver in the next three to five years.
Another reason for being bullish on Wipro is the proactive approach the company has taken for various new initiatives that can potentially be game changing for revenue growth from within India. On March 15, Wipro announced that the company along with Schneider Electric will develop convergent solutions for Indian smart cities. In the next five to 10 years, there is likely to be huge investment allocated to smart cities.
When I discussed Infosys (INFY, Financial) recently, I mentioned that innovation is likely to be one of the key growth drivers in the future. Wipro has also been focusing on investing in new technology, and one or more of these investments could be productive in the future. Wipro Ventures is a strategic arm of Wipro with an initial investment capital of $100 million. With the venture focused on investing in early to midstage startups, the returns can be multifold and disruptive technology can be integrated into Wipro.
Inorganic growth is another stock upside trigger for Wipro, and the company has been aggressive in terms of acquisition in the past. Wipro recently completed the acquisition of HealthPlan Services, and the acquisition of Viteos Group is pending regulatory approval. With cash and short-term investments of $3.6 billion as of December 2015, I expect more acquisitions in the coming quarters that are directed toward expanding the company’s services and driving more innovation.
From an industry perspective, the offshore market is likely to grow at a CAGR of 14% for the next nine years, according to Wipro’s latest presentation. If this holds true, there is immense growth potential for Wipro with a strong cash buffer and focus on innovation. However, the exchange rate factor is a critical component; if the Indian rupee stays above INR60 per dollar, the outsourcing industry will continue to benefit.
The robust activity in the outsourcing industry is evident from the point that Wipro added 39 new clients for the quarter ended Dec. 31, 2015. I expect strong client addition activity to continue in the future and domestic client addition is also likely to be robust.
Wipro is worth considering for the long term with the company having strong fundamentals, good growth visibility and potential upside through inorganic growth. The company’s investment in startups is likely to yield results in the next three to five years and can be game changing from a growth perspective.
Disclosure: No positions in the stock.
