Neutral Wipro; target of Rs 380: Motilal Oswal

Motilal Oswal's research report on Wipro

WPRO reported a 2QFY23 IT Services' revenue of USD2.8b (up 4.1% QoQ in CC terms), in line with its guidance and our estimate (including a 130bp gain from the Rizing acquisition). The EBIT margin in IT Services stood in line at 15.1% (up 10bp QoQ). Its 3QFY23 USD CC revenue growth guidance of 0.5-2% QoQ was disappointing and missed our estimate by 50bp. The management also guided at a stable margin performance in 3QFY23. We were disappointed by WPRO's weak 3QFY23 revenue growth guidance. While the management blamed this on macro uncertainty and geopolitical issues, it said that it has started to see a slowdown in the Consulting business, although the same was partially compensated by cross-selling in Services. We remain concerned given the vulnerability of Consulting due to its early cycle nature. Moreover, the low employee addition in 2QFY23 also adds to near term growth concerns. We are factoring in a FY22-24 USD revenue CAGR of 7.8% - the weakest in our Tier I IT Services coverage. WPRO is on track to deliver a 230bp drop in EBIT margin in FY23 (excluding a one-off impact in 2Q due to the restructuring in Europe), which inhibits the management's ability to focus on growth. We expect WPRO to stay meaningfully behind its 17-17.5% medium term IT Services' EBIT margin guidance over the next two years. With the Consulting business slowing down, risk to profitability from a weakness in Capco continues to rise and may force WPRO to choose between scaling up the vertical and margin.

Outlook

We lower our FY23/FY24 EPS estimate by 6%/2% to factor in a miss on margin. We maintain our Neutral stance as we await: a) further evidence of the execution of WPRO's refreshed strategy, and b) a successful turnaround from its growth struggles over the last decade before turning more constructive on the stock. Our TP implies 16x FY24E EPS.

More Info

At 12:53 hrs Wipro was quoting at Rs 378.75, down Rs 29.00, or 7.11 percent.

It has touched an intraday high of Rs 392.25 and an intraday low of Rs 378.60.

It was trading with volumes of 1,387,962 shares, compared to its thirty day average of 587,571 shares, an increase of 136.22 percent.

In the previous trading session, the share closed up 0.85 percent or Rs 3.45 at Rs 407.75.

The share touched its 52-week high Rs 739.80 and 52-week low Rs 384.60 on 14 October, 2021 and 26 September, 2022, respectively.

Currently, it is trading 48.8 percent below its 52-week high and 1.52 percent above its 52-week low.

Market capitalisation stands at Rs 207,768.60 crore.

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Wipro - 131022 - moti