Wipro’s turnaround on track but the stock offers little upside: Analysts

NEW DELHI: ‘s turnaround is on track, but the high valuation of the stock leaves little room for a miss. This is what a domestic brokerage said after the IT major’s June quarter beat. Others agree.

The IT major clocked its highest-ever organic revenue growth sequentially (in constant currency terms) in the past 38 quarters, which was way ahead of Wipro’s own quarterly guidance. Analysts have raised Wipro’s FY22 earnings forecast by 2-6 per cent and also 12-month price targets, marginally. But those targets suggest no upside.

said Wipro’s valuation remains rich, as it trades at a low single-digit valuation discount to , despite 5 per cent lower earnings CAGR expectations over FY21-24 and 10 per cent lower return on equity (ROE). It revised its price target for the stock to Rs 565 from Rs 550 but maintained a ‘hold’ rating.

Foreign brokerage UBS said one can see some upgrades in consensus earnings estimates for Wipro, given the Q1 beat and likely higher revenue attribution from recently acquired Capco, but the recent runup in the stock may cap any near-term upsides, as was the case with Infosys. Lower TCV addition could cause some concern, it said.

The IT firm reported eight large deals for the June quarter with a combined TCV (total contract value) of $715 million

The scrip rose 0.4 per cent to Rs 578 in Friday’s trade. With this, it is up 121 per cent in the last one year.

“Wipro’s turnaround effort is gaining speed and on the right track. But valuations at 24 times FY2023 already discount this potential and do not provide any margin of safety. We take cognisance of the overall momentum and accelerated progress in the turnaround journey and raise FY2022-24 revenue estimates by 2-3 per cent. We cut our margin assumption by 20-30 bps. Net result is 2-6 per cent increase in EPS,” Kotak said, as it valued the stock at Rs 560.

The IT major had been underperforming the Tier I IT pack for the past couple of years due due to its higher exposure to challenged verticals such as Healthcare and ENU (energy, natural resources & utilities). Analysts said changes at the company level, including restructuring in India and the West Asia, further constrained the numbers.

“The current restructuring and investments will take a toll on near term margin, eating away at the gains from operational efficiency. This should keep margin rangebound. We maintain our ‘Neutral’ stance as we await further evidence of execution of Wipro’s refreshed strategy, and successful turnaround from its growth struggles over the last decade before turning more constructive on the stock,” Motilal Oswal Securities said.

Wipro reported an organic revenue growth in CC terms of 4.9 per cent QoQ, which was the highest in nine years and was way above the management’s guidance of 2-4 per cent. Overall, CC revenues were up 12 per cent QoQ, with Capco contributed two months of revenues and witnessed strong sequential growth.

On the operating front, the company’s margin performance suffered likely due to wage hikes undertaken to retain talent. The consolidated operating margin shrank 220 basis points sequentially to 18.8 per cent. Attrition rate jumped to 15.5 per cent from 12.1 per cent in the previous quarter despite the wage hikes undertaken by the company earlier this year. Wipro said the situation will remain similar in the coming quarters even as the company committed to hiring 12,000 freshers in 2021-22 and 22,000 in 2022-23.

The IT major guided for IT services revenue in $2,535-$2,583 million in September quarter, implying 5-7 per cent sequential growth. The management, analysts said, remained fairly confident of delivering double-digit organic revenue growth in FY22 and reiterated its EBIT margin guidance of 17-17.5 per cent for the year.

“We have add rating on the stock, considering the current valuation,” said Piyush Pandey, Lead Analyst for Institutional Equities at YES Securities.

The IT firm said its consolidated net profit rose 35.6 per cent YoY to Rs 3,242.6 crore for the June quarter compared with Rs 2,390.4 crore in the year-ago period.

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