Jan 18, 2014 03:10 PM IST | Source:

Reduce Wipro; target of Rs 540: Dolat Capital

Brokerage house Dolat Capital has recommended a reduce rating on Wipro with a target price of Rs 540 in its January 17, 2014 research report.

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Dolat Capital's research report on Wipro

"We continue to maintain our sector underperformer call on Wipro owing to its sustained underperformance in 9MFY14 and discouraging outlook on clients budgets for CY14 as evident from its modest Q4 guidance, weak employee growth (2.5 percent growth on LTM basis) and miss from its long held aspiration of growing inline with peers which still seems tough target to achieve. We believe that the growth rate would converge in FY15 for Tier I vendors but Wipro would still remain an underperformer given few drivers of growth in its portfolio."

"The results are in line with our estimates with a 2.3 percent QQ growth in IT services in the constant terms. The growth in the quarter has been broadened across the verticals and geos but still not shown consistency in major parts of its portfolio. It has alluded that the budgets are improving on run the business side but still under pressure on the change the business side of the services segments and thus we believe sporadic nature of its growth lacks the confidence of a strong recovery in near term and does not see it getting its growth aligned with peers in FY15."

"It has marked a 54bps gain in its IT services OPM at 23 percent (flat for overall company) with a total EBIT growth of 4.4 percent QQ ahead of our estimates, largely driven by operational efficiency and efficiencies on volumes and wage cost. We believe it would be tough for Wipro to improve OPM hereon given its sustained investments needs in S&M to shore up traction, declining profitability in product business, indirect pricing pressures from clients and persisting attrition challenges. We have largely retained our estimates implying a Revenue/EPS CAGR of 13/13 percent over FY13-16E."

Valuation: "We continue to maintain our sector underperformer call on Wipro owing to its sustained below par performance despite its three long years efforts on the strategic revival.  We largely maintain our estimates and have built in 13/17 percent Revenue/EBIT CAGR over FY13-16E. We recommend Reduce rating on the stock, with a TP of Rs 540 valued at 14x of its FY16E earnings," says Dolat Capital research report.

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