Wipro shares: Consulting exposure, muted expectations offer recovery play, says Motilal Oswal

Motilal Oswal Securities in its latest note on Wipro Ltd said that an improvement in large deal wins and quarterly deal total contact value (TCV) of $1 billion-plus indicate that the IT firm's strategies are proving to be effective despite challenging macroeconomic conditions.

The brokerage believes that Wipro’s prevailing valuations at 18 times FY25E EPS are relatively inexpensive and can improve once the macroeconomic environment improves. “We keep a close watch on macro recovery and the discretionary spends before we turn positive on the name," the brokerage said.

Wipro had undergone structural changes while overhauling its key leadership team and making bold investments to acquire inorganic capabilities. Motilal Oswal Securities said the revenue conversion for Wipro would improve once the macro challenges recede and enterprises resume their discretionary IT spends.

Wipro, it said, is doubling down its efforts to improve margins. "Although the IT firm has witnessed partial recovery post the inorganic investments, it is making further efforts to turnaround and improve the margin profile of the acquired entities," the brokerage said.

While Motilal Oswal believes that 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 Oswal said.

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"Given the high consulting exposure (15 per cent of revenues), Wipro should 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 large valuation gap with peers (16 per cent/23 per cent discount to large cap/overall peer median FY25 P/E)," the brokerage said.

The domestic brokerage said that Motilal's business performance has been lacklustre over the last six quarters, following a robust FY22 performance after Thierry Delaporte assumed the role of CEO in July 2020.

The demand softness in key verticals (BFSI and Consumer) and high exposure to discretionary Consulting vertical (especially Capco) have weighed on Wipro's operational performance, Motilal Oswal Securities said. This even as the IT firm made significant internal changes to improve decision making and refresh business leadership.

"We continue to see weak near-term performance (revenue decline of 4.4 per cent CC in FY24E), followed by a recovery of 7.3 per cent CC in FY25, but keep a close watch on macro recovery and discretionary spend revival. We maintain NEUTRAL with a target price of Rs 460 (premised on 20 times FY25 EPS)," the brokerage said.

The brokerage is expecting FY24 dollar revenues to decline 4.4 per cent and FY25 dollar revenue to rise 7.3 per cent CC YoY with FY24 IT Service margin at 15.7 per cent and FY25 margin at 17 per cent. This would be against a 17-17.5 per cent.

Kotak Institutional Equities, meanwhile 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." This brokerage has rolled over its estimates to the December quarter and value the stock at 15 times December 2025 earnings, leading to an fair value of Rs 390.

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