Sell Wipro; target of Rs 220: HDFC Securities

HDFC Securities' research report on Wipro

Revenue (USD 2,039mn, -1.8/2.5 QoQ/YoY) missed estimates. BFSI (32% of mix) slowed down (-0.6% CC QoQ vs +2.1% 4-qtr CQGR) due to softness and delays in decision making (capital markets and large European banks). Revenue guidance of 0% to +2% CC growth in 2QFY20E is below expectation. It builds in slowdown in BFSI, delays in client decision making and completion of some large engagements. We sense growth challenges for Wipro will persist, led by client specific issues, weakness in consumer, manufacturing, HPS and continued legacy drag. Digital growth was healthy at 5.6% QoQ, but the pressure on legacy business (-5.7% QoQ decline) is higher vs peers (TCS/INFY -0.1/-0.6% QoQ). Wipro has significantly lagged Tier-1 IT on revenue growth for more than five years now. IT services EBIT margin at 18.5% (-77bps QoQ) was impacted by wage hike (one month), currency and visa cost. Ind AS 116 impact was minuscule (~0.1%). Margin challenges are likely considering wage hikes, tight labour market, localisation cost and peaking utilisation rate (85% ex-trainees).

Outlook

We maintain SELL on WIPRO, post weak 1QFY20 and tepid guidance for 2Q. Wipro’s revenue growth remains the lowest in tier-1 IT. In view of growth challenges, peaking margins and taxation on buyback we further cut our target multiple. Our TP of Rs 220 is based on 12x (vs. 14x earlier) Jun-21E EPS.