Motilal Oswal has given Neutral recommendation for Wipro with a target price of Rs. 710 in its research report issued on Oct 14, 2021
Motilal Oswal’s research report on Wipro
WPRO reported a strong (8.1% QoQ CC) revenue growth in IT Services in 2QFY22, ahead of our estimate of 6.9%. Organic growth (excluding Capco) of 4.5% QoQ also came in ahead of our estimate. The management highlighted that the growth was broad based in 2QFY22, including at Capco, which it is delivering ahead of plan. Despite a M&A impact and wage hike, EBIT margin in IT Services was flat QoQ (excluding a one-off in 1QFY22) at 17.8%, 170bp ahead of our estimate. It reported a TCV of USD580m in 2QFY22, down 19% QoQ. Deal TCV is up 19% YoY in 1HFY22. WPRO’s operational metrics remain impacted by supply tightness, with attrition increasing by 500bp QoQ to 20.5% and utilization (excluding trainees) of 89.2% (+240bp QoQ), despite adding 11.5k employees (5.5% of its 1QFY22 strength). The management expects attrition to further inch up in 3QFY22 and said it will take a few quarters to normalize. 3QFY22 revenue growth guidance of 2-4% QoQ (including impact of Ampion acquisition) was in line with our estimate. We see the guidance as positive, given the supply constraints and seasonality, but remain watchful on margin as the company continues to operate ahead of its guidance of 17-17.5%. We now expect FY22 IT Services’ revenue growth at 28% (19.5% YoY organic growth). With better than expected margin performance, we have raised our FY22E/FY23E EBIT margin estimate by 100bp/30bp, which will result in a FY21-23E PAT growth of 13%.
The management’s growth strategy, continued investment in talent, and a simplified operational model to help improve the focus on customers has started to play out and will support valuation, but the current valuation of 27x FY23E P/E is fairly baking in this improvement. We upgrade our FY22E/FY23E EPS estimate by 7%/2% to factor in a better growth performance. We maintain our Neutral stance as we view the current valuation as fair. Our TP implies 28x FY23E EPS.