Wipro soars 10% as Q3 earnings beat expectations but analysts still in ‘wait and watch’ mode

Shares of Wipro surged 10 percent  on January 15 to hit a fresh 52-week high as the company’s December quarter earnings beat estimates, and its American Depository Receipts (ADRs) surged almost 18 percent to hit a near-20-month high of $6.35 after the company reported its results on January 12.

Wipro’s net profit fell 12 on-year to Rs 2,694 crore, and consolidated revenue came in at Rs 22,205 crore, down 4.4 percent on-year. However, analysts at Motilal Oswal view Wipro’s Q3 performance as positive given that the company struggled to deliver on expectations over the last few quarters due to macro headwinds.

This is the fourth consecutive quarter wherein Wipro has reported a fall in profits YoY. and analysts expect Wipro to continue underperforming peers, primarily due to intriguingly low correlation between its deal wins and top-line growth.

At 9:16 am, Wipro shares were trading nearly 10 percent higher at Rs 511.95 on the National Stock Exchange (NSE).

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The third quarter is typically a weak one for IT companies due to the holiday season in the US and Europe with furloughs and fewer working days’ impacting performance.  For Wipro, the decline in revenue was expected primarily due to the continued weakness in the BFSI vertical as well as the company’s high exposure to consulting at a time when discretionary spending has plummeted.

Wipro’s muted performance and Q4 guidance leave much to be desired, said Nuvama Institutional Equities, though analysts do see signs of gradual improvements. “We continue to anticipate Wipro to underperform peers, primarily due to its low correlation between deal-wins and top-line growth, not helped by the continuous exits,” it said.

Outlook

In the quarter ended December 2023, Wipro won large deals worth $0.9 billion, lower than $1.28 billion it won in the last quarter. Total deal wins stood at $3.8 billion, which is similar to what the company had recorded in the September quarter.

“Wipro management’s commentary on higher deal wins in the consulting vertical indicates that the drag from that segment is now bottoming out, which should help improve overall growth,” said Motilal Oswal Financial Services in its report.

According to IDBI capital, Wipro is seeing early signs of a return to growth in consulting, as demonstrated by the double-digit growth in order bookings in Capco business. It is also seeing some green shoots in discretionary spend. Further, order book of $3.8 bn (book to bill of 1.43x) will boost revenues, it said.

Hence, analysts now expect revenue growth to improve over FY24-FY26. Going forward with levers like higher utilisation, pyramid rationalisation, absence of restructuring expense, resources re-allocation and higher consulting, revenues will drive margins.

Also Read | Wipro ADRs jump 18% to near 20-month-high following Q3 results

Given Wipro’s weak 3Q FY24 revenue growth and muted 4Q guidance, the brokerage expects Wipro’s FY24 revenue growth rate to be one of the lowest among Tier-1 IT Services peers, with margin below the management’s medium-term guided range of 17.0-17.5 percent.

It maintained a ‘Neutral rating on the stock as analysts await further evidence of the execution of the company’s refreshed strategy, and a successful turnaround from its struggles over the last decade before turning more constructive on the stock. The brokerage pegged a target price of Rs 520 in Wipro shares based on 19x FY26E EPS.

IDBI Capital has upgraded its rating on Wipro to ‘Buy’ from ‘Hold’ earlier with a revised target multiple of 20x vs 17x leading to a target price of Rs 535 (vs Rs 390 earlier). “Wipro’s ability to win large deals (14 deals worth US$0.9 bn), robust order bookings (US$3.8 bn) and client mining could be key revenue drivers in improving macros,” it said.

Wipro has realigned client-facing profiles and is focusing on mining strategic accounts as a growth strategy. While the client mining efforts would give revenues a leg-up, Wipro needs to win new large clients to catch up on growth with peers, said Nuvama, adding that improvement in its large deal market share would help it report revenue growth one a par with peers’.

The brokerage retained its ‘hold’ call on the stock with a target price of Rs 460 stating that the stock’s inexpensive valuation and high dividend yield limit the downside potential.

Also Read | Wipro Q3 results: Net profit down 12% to Rs 2,694 crore in fourth consecutive quarterly decline

Wipro: Lower visibility compared to peers, less favorable relative valuations

Morgan Stanley has assigned an Underweight rating to Wipro, with a higher target price of Rs 460 per share. While acknowledging initial indications of a shift in business mix, the international brokerage emphasizes the need for caution, deeming it too early to confirm a definite trend.

The positive trajectory in revenue growth and favorable management commentary contribute to higher EPS estimates. Anticipating the stock to open with a gap in line with the ADR, Morgan Stanley maintains a ‘Relative Underweight’ stance due to lower visibility on FY25 compared to peers and less favorable relative valuations.

Nomura has issued a ‘Reduce’ rating for Wipro with a target of Rs 410 per share. While acknowledging Wipro’s Q3 FY24 outperformance in revenues and margins, Nomura remains cautious due to weak Q4 guidance and soft deal wins. Despite early indications of a recovery in discretionary demand, Nomura believes margin improvement for Wipro is unlikely in FY24.

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