Neutral on Wipro, target price Rs 188: Motilal Oswal

Motilal Oswal has given a neutral rating to Wipro with a target price of Rs 188, an upside of 1 per cent over the CMP of Rs 187.

In the fourth quarter of FY20, gross margins witnessed sharp contraction (~200 bps quarter on quarter ex. one-offs) despite increase in utilisation ( about 300 bps), rupee depreciation ( around 2.6 per cent) and the fact that Covid-19 disruption during the quarter was only partial. This hints at the possibility that margin disruption could be sharper (than currently built in) when the full-period impact of the pandemic is realized.

The brokerage says the outlook on demand, pricing and working capital is bleak as per expectation. On top of the sector specific uncertainty, there are also risks like CEO transition and execution challenges. Given these issues, Wipro may not be a credible barometer of the sector’s current prospects. However, investor sentiment around the sector would likely be impacted due to this outlook. The brokerage has cut its margin estimates further and rebased exchange rate assumptions and downgraded FY21-22E EPS by 3-5 per cent.


The share price of the company moved down by -0.62 per cent from its previous close of Rs 186.55. The last traded price is Rs 185.40. Incorporated in 1945, Wipro has a market cap of Rs 106583.27 crore.


Investment Rationale

In line with the brokerage’s expectations, the company has temporarily discontinued its practice of providing revenue growth guidance for the subsequent quarter. However, the management has hinted at sequential revenue decline. Currently, Wipro does not have visibility of the extent to which Covid-19 will disrupt its operations (volumes and pricing). The management has highlighted the need for tremendous response on costs and anticipates pricing pressure and stretch in working capital cycles. The company expects heavy disruption in the near term in verticals like retail, hospitality, travel, energy and auto. In BFSI, management expects near-zero interest rates to impact spends over the medium term.

Over the past few years, Wipro has been underperforming tier-I companies on growth, partly due to its higher exposure to verticals facing challenges (e.g. Healthcare and ENU). In addition, company level changes (e.g. restructuring in India/Middle East, etc.) have further constrained growth.
On downgraded earnings, the stock is currently trading at ~12 times one-year forward P/E, at 20 per cent discount to its long-term cross cycle averages. However, given the heightened uncertainty both at the sector and company level, multiples are likely to remain subdued.

Financials

In the fourth quarter of FY20, Wipro’s revenue (US$) /EBIT (Rs) /PAT declined 1 per cent/1 per cent /12 per cent year on year (v/s our estimated decline of 1 per cent/5 per cent/11 per cent YoY). For FY20, revenue (US$) / EBIT (Rs ) /PAT grew by 0 per cent/8 per cent/6 per cent YoY on a reported basis. According to Wipro’s estimate, IT Services’ revenue was negatively impacted by Covid-19 to the tune of $14-16 million (0.7-0.8 per cent of revenue).