Shares of Wipro fell 7 percent intraday Wednesday on disappointing guidance. Guidance for July-September period was far below estimates as Wipro expects revenue from IT services business to be in the range of USD 1931-1950 million, a growth of 0.01-1 percent over Q1. A CNBC-TV18 poll had expected dollar revenue growth guidance in range of 1.5-3.5 percent for September quarter.
Most analysts are cautious on the stock post June quarter results and hold a neutral rating but few find its valuations to be reasonable.
Bank of America Merrill Lynch has a neutral rating with a target price of Rs 540 per share stating that Q1FY17 is yet another quarter of revenue decline in the top five customers and limited additions to client base (USD 10 million+/USD 20 million). It has cut FY17-18 earnings per share (EPS) by 4-5 percent. Given limited offset available from utilisation rate and operating leverage, it expects FY17 EBIT percentage to decline 150 basis points (bps) on annual basis.
Delay in stabilisation of spends in the energy segment and impact from restructuring of the India and Middle East businesses are the key drags expected in Q2.
Macquarie also has a neutral rating with a target price of Rs 570 but thinks pick up in energy vertical and USD revenue growth inching back to industry level to be catalysts for the stock.
The brokerage firm expects Wipro to lag its peers, TCS and Infosys, in USD FY17 revenue growth and 160bps margin decline to 18.9 percent in IT services. Overall, integration of acquisitions made in prior years, investments in digital space and clients continued to drag margins. Macquarie feels softer dollar revenue growth would also pressurise on margins but Wipro expects an 80 bps margin impact due to integration of recent acquisition.
Maintaining a neutral rating, Credit Suisse says Wipro will find it difficult to get visibility near term as there are some segmental challenges with no easy problems to fix.Citi has maintained sell rating with a target of Rs 515 per share and trimmed estimated by 2-4 percent as it expects 7 percent revenue growth and flattish EPS in FY17. "Some of the sectoral challenges are becoming more visible and there is commoditization happening in traditional services. We believe risks to downside remain given medium term challenges and Brexit related overhang – maintain our cautious view on the sector," Citi says.
Ambit is negative on the stock with sell rating and a target of Rs 550 per share. The brokerage firm warns that company may face headwinds from weak energy segment and has also decided to restructure its India and Middle East business. Attrition also spiked by 300 bps to 17.9 percent as the company increased the dispersion between good performers and average performers in its wage hikes.Wage hikes are expected to hurt EBIT margin by 200 bps QoQ in the September quarter, but management hopes to recover some of these with the help of productivity improvement initiatives.
However, Deutsche Bank advises to hold the stock for a target of Rs 560 per share as it finds the stock to be fairly priced at 16xFY17E (15 percent discount to TCS). Worried about guidance, Brexit overhangs and weak Q1, it has cut FY17/FY18earnings estimates by 5.1 percent/3.6 percent respectively.
On a positive note, the brokerage firm says that apart from improving large deal win rates to chart a sustainable recovery, it will look for signs of recovery in top client and energy and utilities vertical to turn positive on Wipro.
ICICI Securities suggests to add the stock with a target of Rs 549 per share given the reasonable valuation of 14x FY18 EPS and strong balance sheet/healthy cash generation which gives the company flexibility to continue adding strategic assets through the inorganic route.
"Initiatives taken by the new CEO in terms of integration of services for better client-mining, tighter integration of delivery into sales for better solutioning, accelerated focus on automation and end-to-end focus on Digital from advisory and experience to integration is likely to drive a more gradual rather than any sharp improvement in the fundamentals," ICICI Securities reiterates.
However, it has lowered FY18 EPS estimate by 9 percent due to lower revenues margins.Follow @NasrinzStory
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