July 20, 2016 / 16:46 IST
Religare's research report on Wipro
WPRO reported a weak Q1 with a 230bps QoQ contraction in IT services margins and a 8% QoQ/7% YoY decline in PAT to Rs 20.6bn. However, IT services CC revenue growth of 2.0% met the guidance and was the only saving grace. EBIT margins were hit by wage hikes (one month impact), integration of the HPS acquisition and accounting changes. Further, Q2FY17 margins would be affected by wage hikes for the remaining period (2 months; -200bps impact).
Growth deceleration in the sector is much faster than anticipated and margin pressures are more pronounced. We note that earnings risks are being realised and the size of estimate cuts is growing, refer to our note Beyond Q1, margin recovery on a weak wicket. We pare FY17E/FY18E EPS by 8%/5% to factor in margin headwinds, and also our target multiple to 14x (14.5x earlier) to arrive at a Mar’17 TP of Rs 550. HOLD.
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