Wipro Q1: Brokers wary as numbers subdued, growth guidance weak

Following the subdued Q1 earnings and a weak growth guidance, many brokerages expect Wipro to underperform its large-cap peers in the coming quarters.

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Information technology major Wipro posted a lower-than-expected bottomline for the April-June period and also rolled out weak growth guidance for the ongoing quarter, which has resulted in a flurry of caution views from brokerages.

However, as expectations of the company reporting the weakest set of quarterly earnings among large-cap IT companies were already priced in by the market, the stock did not react to this development. At 09.24 am, shares of Wipro were trading 0.3 percent higher at Rs 395.35 on the National Stock Exchange.

The IT services company reported a net profit of Rs 2,870 crore in the first quarter after market hours on July 13. Though the bottomline was up around 12 percent on year, it fell 6.6 percent on a sequential basis, largely due to a decline across all major financial metrics. Moreover, the net profit for the quarter under review also lagged the Street’s estimate of Rs 2,976 crore.

Revenue also grew 6 percent on year to Rs 22,831 crore but that too missed estimate of Rs 23,014 crore. Sequentially, the topline was up 1.6 percent from Rs 23,176 crore seen in the previous quarter.

The lower-than-expected revenue was a result of persistent weakness in the banking, financial services and insurance (BFSI) vertical as well as its higher exposure to consulting at a time when discretionary spends have fallen.

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Meanwhile, the company also rolled out a revenue growth guidance of  -2 percent to 1 percent in constant currency terms for the July-September quarter on the back of a challenging macro environment.

Jefferies stated that softness in deal wins during Q1 and a subdued growth guidance for Q2 do not provide any comfort for Wipro. On top of that, factoring in the weak results in Q1, Jefferies also lowered its revenue estimate for Wipro by 1-2 percent and earnings estimates by 2-3 percent. Rounding that up, the brokerage anticipates the company to report an earnings CAGR (Compounded Annual Growth Rate) of 6 percent over FY23-25.

Also Read: Wipro Q1 Results: Net profit rises 12% YoY to Rs 2,870 crore, misses estimates

On the other hand, Morgan Stanley, which has an ‘underweight’ call on the IT company, with a price target of Rs 352, highlighted that the deceleration in Wipro’s revenue growth was much steeper than its peers. The firm believes that until Wipro manages to narrow that gap, its P/E discount will likely remain higher as compared to its peers.

Another brokerage firm, Nomura also sounded cautious as it feels Wipro is unlikely to see any margin improvement in FY24. The firm attributed signs of pressure on near-term growth and weak discretionary demand trends as factors behind its cautious outlook. Nomura has a ‘neutral’ rating on Wipro, with a price target of Rs 375.

Domestic brokerage Nuvama Institutional Equities also expects Wipro to underperform its peers in the near term,  primarily due to its intriguingly low correlation between deal wins and top-line growth. “Wipro’s muted Q1 performance and weak Q2 guidance reaffirm its troubles with converting deal-wins into growth,” Nuvama stated in its report.

However, the firm also believes that the stock’s inexpensive valuation and high dividend yield should limit its downside potential in the medium term. Despite that, Nuvama has assigned a ‘hold’ rating for the stock, while cutting its price target by 2.4 percent to Rs 400.

Backing Nuvama’s view, Motilal Oswal Financial Services also expects Wipro’s FY24 organic growth to be one of the lowest among tier-1 IT services peers, with a margin below the management’s medium-term guided range of 17.0-17.5 percent.

The broking firm also maintains a ‘neutral’ rating for the scrip as it awaits further evidence of the execution of Wipro’s refreshed strategy, and a successful turnaround from its struggles over the last decade before turning more constructive on the stock. MOFSL gave a price target of Rs 380 for the stock.

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