Back to usual underperformance! What analysts are saying on Wipro's Q1 show

NEW DELHI: Wipro's June quarter results failed to enthuse analysts who said growth and margin both missed Street estimates, even as deal wins remained strong. Wipro was back to the usual underperformance that it generally reported for the June quarters in recent years, they said. Factoring in the first quarter figures, analysts have largely cut annual earnings estimates for the IT firm by 5-9 per cent and see limited upside potential for its scrip despite recent underperformance by IT peers.

Wipro's Ebit margin at 15 per cent for the quarter was the lowest since September 2018. The IT major is likely to miss the 17-17.5 per cent margin outlook through FY23 at the least, said JM Financial, adding that Wipro was "back to usual Q1 underperformance".

"Cash generation for the June quarter was very weak. The second quarter revenue growth outlook of 3-5 per cent QoQ in CC terms, solid deal wins (after the subdued wins in recent quarters) and strong hiring, however, remain positives in an otherwise weak earnings report," JM Financial said while cutting its FY22-25 EPS estimates by 5-9 per cent to reflect lower margin assumptions primarily.

Wipro reported its June quarter profit at Rs 2,563 crore, a dip of 20.9 per cent year-on-year (YoY). An ET NOW poll had estimated PAT at Rs 2,950 crore. Its revenue for the quarter rose 17.9 per cent YoY to Rs 21,528.6 crore. In constant currency (CC) terms, IT services segment revenue increased by 2.1 per cent QoQ and 17.2 per cent YoY at $2,735.5 million.

Margin pressure may erase Wipro's FY23 earnings, warned Motilal Oswal Securities. The drop in EBIT margin surprised this brokerage, given the absence of any one-time factor.

While Wipro should see a margin improvement in the September quarter as it shifts the full impact of the wage hike to the December quarter, it is likely to stay meaningfully behind its 17-17.5 per cent medium-term EBIT margin guidance for IT Services over the next two years, Motilal Oswal added.

"We see Wipro's consulting exposure, which is over 10 per cent of revenue in the last one year, as a potential risk to both growth and profitability. While it is not seeing any impact currently, we expect the impact of a slowdown in client spend for the industry in H2FY23, which should have a more pronounced drag on its recent acquisitions (Capco and Rizing) in the consulting space. This remains the key concern on the stock price," it said while suggesting a target of Rs 390 on the stock.

Prabhudas Lilladher sees the stock at Rs 418; JM Financial at Rs 470, HDFC Securities at Rs 475 and YES Securities at Rs 482.

The scrip on Thursday traded at Rs 414 a piece on Thursday morning. The scrip has fallen 43 per cent in 2022 so far, as the year-on-year favorability on growth aided by acquisitions has been weaning away with a slip up in margins due to inorganic aid and industry-wide supply side pressures, analysts said. The BSE IT index has fallen 6 per cent year-to-date.

The company management, however, said the demand environment continues to remain strong as deal booking for Q1FY23 is at $1.1 billion, up 32 per cent YoY and the deal pipeline remains at an all-time high. Attrition has started moderating and that will ease off pressure on margin, it said, adding that the new business strategy with focus on deeper connection with clients seems to be working fine.

"We expect EBIT margins to improve in the medium-term led by improving employee pyramid and positive operating leverage. We maintain ADD rating on the stock with revised target price of Rs 482 per share, valuing it at 18.5 times on FY24E EPS," YES Securities said.

Edelweiss said Wipro’s June quarter IT services revenue stood at $2,735 million, which was lower than Street’s estimate of $2,757 million. IT services’ EBIT margin came in at 15 per cent, undershooting Street’s estimate of 16.5 per cent, it noted.

Edelweiss said it has cut FY23 EPS estimate by 4.5 per cent and FY24 estimates by 4.7 per cent and rolled over the valuation to Q3FY24 while maintaining the target price of Rs 851. Edelweiss' target on the scrip, meanwhile, suggested a 105 per cent potential upside.

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