Wipro on ‘sell’ list, least favoured of tier-1 IT stocks on weak outlook, headwinds

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Wipro shares (about Rs 384) have fallen over 2 percent in 2023, underperforming the benchmark Nifty. As many as 18 brokerages out of 45 have ‘sell’ calls on the stock, while 15 have 'hold' calls and 12 have a 'buy' rating. In comparison, Infosys has 21 'buy' calls and 8 'sell' calls.

Q2 Results add concerns

Wipro's revenue fell for the third consecutive quarter due to a broad-based decline in key verticals including BFSI, communication, and manufacturing. Its EBIT margin and deal win total contract value improved marginally. Still, the softness is expected to continue in Q3, according to Motilal Oswal.

"Given Wipro's broader presence in discretionary areas, conversion is a challenge as enterprises are cautious and are reprioritising expenditure," the brokerage said.

Wipro's operating margins are expected to dip in the next quarter due to a wage hike, followed by a sharp recovery in Q4, the brokerage noted, as it maintained a 'neutral' call on the stock with a target price of Rs 418.

Analysts are waiting for further evidence of the implementation of the IT firm's refreshed strategy and a successful turnaround from its struggles over the past decade before turning more constructive on the stock.

Underperformance to continue

Nuvama Institutional Equities expects Wipro to continue underperforming peers Infosys, Tech Mahindra and Tata Consulting Services primarily due to its low correlation between deal-wins and top-line growth.

"The stock’s inexpensive valuation and high dividend yield should limit downside potential in the medium term," the brokerage said, retaining a 'hold' rating on the stock with a target price of Rs 390.

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According to Goldman Sachs, the Bengaluru-based IT firm's Q3 revenue guidance of -3.5 percent to -1.5 percent QoQ indicates a further slowdown.
"We expect weak revenue growth outlook to result in further headwinds to near-term margins,” it said as it cut its FY24-26 EBIT/EPS estimates by up to 8 percent. Goldman Sachs has a 'sell' call on Wipro with a target price of Rs 380.

Worst not over

Religare Broking said there would be challenges for Wipro in the near term, although analysts expect the scenario to improve in the medium- to long-term.

"The worst is yet not over as management has guided muted growth guidance for Q3 FY24… we believe that for next 1-2 quarters financials are expected to remain muted due to prevailing uncertainty," it said as it maintained a 'hold' call on the stock with a target price of Rs 432. "We would gain more confidence once deals start getting converted to revenue and margin stabilises."

Wipro's subpar performance in recent quarters has impacted market expectations significantly. The company's projection of a sequential decline in Q3 constant currency IT revenue, especially in the BFSI vertical, has further dented investor sentiment, said analysts.

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"Wipro is on a sticky wicket with continued growth underperformance versus peers, senior executive attrition, lack of mega deals and revenue leakage. We cut FY2024-26 revenue and EPS (earnings per share) estimates by 3-5 percent and 6-7 percent, respectively. Valuations of 16 times FY25E are inexpensive but justified considering weak growth characteristics," said Kotak Securities.

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