Wipro's June quarter results were a mixed bag. Despite strong deal wins, the near-term outlook remains soft for the IT major with many brokerages suggesting neutral-to-negative stance on the stock post September quarter guidance. Wipro's revenue de-growth at 2.8 per cent sequentially in constant currency (CC) terms came in at the lower end of the guidance of minus 3 per cent to minus 1 per cent. While order inflows were strong for the third consecutive quarter, the Q2 CC revenue growth guidance was muted at minus 2 per cent to minus 1 per cent. Translation to revenues remained sluggish, driven by clients’ focus on upfront cost savings and delay in ramp-ups. Lower discretionary demand continued to affect an early cycle business like consulting, said Nomura India.
Wipro, TCS similarities
Analysts said the Wipro management's commentary resonated with what TCS indicated a day earlier -- there is no confirmation of a H2FY24 pick-up as the macro environment remains uncertain. A Lack of discretionary short-term deals and weakness in BFSI, Technology & Telecom (same as for TCS) seem to be the key problem areas, said Nirmal Bang Institutional Equities.
The brokerage noted that clients are opting for efficiency and automation kind of deals to enable cost savings, which are larger and longer in tenure, impacting short-term revenue conversion from total contract value.
"Pricing has remained stable so far and most client conversations involve use cases or AI-based solutions to be incorporated in the new deals being signed. Lastly, both Wipro and TCS indicated that large US banks are not facing issues and continue to invest with caution," it said.
Wipro share price target
While Nirmal Bang sees the stock at Rs 338, Morgan Stanley has a target of Rs 352 on the stock, BofA Securities at Rs 360, Nomura at Rs 375, Motilal Oswal Securities at Rs 380 and Nuvama Institutional Equities at Rs 400.
Nuvama Institutional Equities said Wipro shares should underperform peers, primarily due to its intriguingly low correlation between deal-wins and top line growth. The stock’s inexpensive valuation and high dividend yield should limit downside potential in the medium-term, it said.
"Wipro’s muted Q1FY24 performance and weak Q2FY24 guidance reaffirm its troubles with converting deal-wins into growth. The decline in Q1 (and possibly Q2) translates into possibly the lowest growth among large-caps – might even report a decline in top line YoY," it said.
Motilal Oswal said Wipro's weak September quarter revenue growth guidance, along with the absence of near-term demand visibility, is likely to more than negate the continued strength in deal momentum over the last few quarters. The management indicated that slower decision-making and cuts in discretionary spends should affect Q2FY24. Moreover, the revenue decline in H1FY24 would result in Wipro delivering a rare revenue decline in FY24, Motilal Oswal said adding that it is unlikely to help share price despite inexpensive valuations.
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