Azim Premji-backed Wipro is in for challenging days ahead, all the way till the end of FY24. The tech giant has posted lacklustre performance over the last six quarters in comparison to its peers. Brokerages believe senior executive attrition coupled with revenue leakage and lack of mega deals keeps Wipro on a sticky wicket. Hence, they expect the company to witness weak performance in the near term. For Wipro’s share price, analysts are of mixed opinion.
In its latest research note, brokerage Kotak Institutional Equities stated that they met Aparna Iyer, CFO of Wipro, to discuss business trends.
As per the brokerage, the key takeaways from the meet are — : (1) demand is showing signs of stabilization with ramp downs decelerating, but incremental demand is yet to pick up meaningfully, (2) revenue uptick in Capco can be a lead indicator of demand, (3) the company
is tapping several levers to maintain margins and (4) external hires at the senior management level in recent years were broad-based.
Kotak pointed out that demand continues to be uncertain with pressure on discretionary spends and lower backfill of projects. Furloughs will be quite intense. Pockets of BPO, data, analytics and cyber security have held up better. Rampdowns are decelerating and signs of incremental growth are available in key markets such as healthcare and consumer in Americas 1. In Americas 2, BFSI clients are slightly stabilizing. Momentum can start building up in 4QFY24 and 1QFY25. In Canada, the ramp-up of new accounts is offset by rampdowns as projects end. Europe will be under pressure in 3QFY24 but the pipeline is strong with vendor consolidation deals.
Moreover, Kotak also shed light on Capco’s performance which was well after the acquisition but was bogged down by the slowdown in discretionary spending. Wipro is confident that consulting can be a differentiating growth driver as the demand cycle turns.
However, the visibility of growth is low. Wipro is generating cost savings through better synergies with acquired entities.
Overall, Kotak’s research note said, “Wipro is on a sticky wicket with continued growth underperformance versus peers, senior executive attrition, lack of mega deals and revenue leakage. The turnaround process appears to have reversed the gains in the past couple of years and may require a re-look. We roll over to the December quarter and value the stock at 15X December 2025E earnings, leading to an FV of Rs390. Maintain REDUCE.”
On the other hand, brokerage Motilal Oswal sounded slightly optimistic for Wipro, however, did not rule out that near-term performance is likely to be weak for the company.
Motilal’s note said Wipro’s business performance has been lackluster over the last six quarters, following a robust FY22 performance after Thierry Delaporte assumed the role of CEO in Jul-20. The demand softness in key verticals (BFSI and Consumer) and high exposure to discretionary Consulting verticals (especially Capco) have weighed on WPRO’s operational performance, despite significant internal changes to improve decision-making and refresh business leadership.
Also, improvements in large deal wins and quarterly deal TCV (USD 1b+) indicate that these strategies are proving to be effective despite challenging macroeconomic conditions.
While there is limited clarity on the timeline for macro recovery in key markets, easing inflation and lower interest rates might encourage the release of discretionary spends, Motilal also added.
Nevertheless, Motilal expects Wipro to be among the early names to benefit from a demand revival. This can act as an upside surprise for a stock with low expectations and a large valuation gap with peers (16%/23% discount to large-cap/overall peer median FY25 P/E).
That being said, Motilal’s note added, “We continue to see weak near-term performance (revenue decline of 4.4% CC in FY24E), followed by a recovery of 7.3% CC in FY25E, but keep a close watch on macro recovery and discretionary spend revival. We maintain NEUTRAL with a TP of INR 460 (premised on 20x FY25E EPS).”
Currently, Wipro shares are at Rs 422.15 apiece on BSE with a market cap of over Rs 2.20 lakh crore. On December 12, the stock closed marginally up.
Year-to-date, Wipro’s share has gained by a single-digit 7.4% on BSE. While its peers like TCS have rallied by 13%, HCL Tech by a huge 32.4% gain, and Tech Mahindra with nearly 21.5% upside. Wipro shares have only performed better than Infosys whose YTD performance is in red with a downside of over 3% as of now.
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Story first published: Wednesday, December 13, 2023, 9:00 [IST]