Motilal Oswal has given Neutral recommendation for Wipro with a target price of Rs. 380 in its research report issued on Oct 13, 2022
Motilal Oswal’s research report on Wipro
WPRO reported a 2QFY23 IT Services’ revenue of USD2.8b (up 4.1% QoQ in CC terms), in line with its guidance and our estimate (including a 130bp gain from the Rizing acquisition). The EBIT margin in IT Services stood in line at 15.1% (up 10bp QoQ). Its 3QFY23 USD CC revenue growth guidance of 0.5-2% QoQ was disappointing and missed our estimate by 50bp. The management also guided at a stable margin performance in 3QFY23. We were disappointed by WPRO’s weak 3QFY23 revenue growth guidance. While the management blamed this on macro uncertainty and geopolitical issues, it said that it has started to see a slowdown in the Consulting business, although the same was partially compensated by cross-selling in Services. We remain concerned given the vulnerability of Consulting due to its early cycle nature. Moreover, the low employee addition in 2QFY23 also adds to near term growth concerns. We are factoring in a FY22-24 USD revenue CAGR of 7.8% – the weakest in our Tier I IT Services coverage. WPRO is on track to deliver a 230bp drop in EBIT margin in FY23 (excluding a one-off impact in 2Q due to the restructuring in Europe), which inhibits the management’s ability to focus on growth. We expect WPRO to stay meaningfully behind its 17-17.5% medium term IT Services’ EBIT margin guidance over the next two years. With the Consulting business slowing down, risk to profitability from a weakness in Capco continues to rise and may force WPRO to choose between scaling up the vertical and margin.
Outlook
We lower our FY23/FY24 EPS estimate by 6%/2% to factor in a miss on margin. We maintain our Neutral stance as we await: a) further evidence of the execution of WPRO’s refreshed strategy, and b) a successful turnaround from its growth struggles over the last decade before turning more constructive on the stock. Our TP implies 16x FY24E EPS.