Hold Wipro; target of Rs 525: ICICI Direct

ICICI Direct's research report on Wipro

IT services EBIT margins remain unchanged at 17.8% in Q2FY17 and were above our estimate of 17% largely on account of a two month wage hike impact offset by robust operational efficiencies like offshoring, utilisation and automation. Going ahead, we expect Wipro’s H2FY17E margin to remain under pressure due to integration of Appirio acquisition and muted revenue growth in Q3FY17. Overall, we expect IT services EBIT margin to remain at 17.7% in FY17E and 17.9% in FY18E.

At the current CMP, Wipro is trading at attractive valuation of 13.7x FY18E EPS. However, due to its muted revenue growth and guidance coupled with margin pressure post Appirio acquisition, we anticipate Wipro’s earnings will remain under pressure, going forward. Even key operating metrics such as top accounts and energy vertical (15% of revenues) continue to remain soft. Consequently, we cut our earnings estimates by 6.2-6.7% in FY17E, FY18E, respectively, and estimate it will report slower rupee revenue CAGR of 7.7% in FY16-18E. Hence, we have a HOLD recommendation on the stock with a revised target price of Rs 525/share (14x FY18E).