Wipro shares: Kotak says 'Sell' stock as discount with Infosys, HCL Tech narrows

Kotak Institutional Equities has downgraded Wipro Ltd to 'Sell' from 'Reduce' and suggested a revised fair value of the stock at Rs 440 from Rs 430 earlier, following a sharp 34 per cent stock upmove in the past three months. There is little margin of safety on Wipro, the brokerage said.

The Wipro price target suggests a 17.20 per cent potential downside for the IT stock over the previous close of Rs 531.40.

The Wipro stock is expensive at 21 times FY2026 earnings and trades at just 6-9 per cent discount to Infosys Ltd and HCL Technologies Ltd despite significantly weaker fundamentals.

"We expect recovery in discretionary spending to be moderate at best in FY2025 and forecast continued significant growth underperformance versus peers and industry. Wipro continues to face multiple challenges that have not been easy to address," it said.

Kotak said Wipro has materially underperformed peers such as Infosys and HCL Tech on growth in the past several years and yet commands hefty multiple of 21 times FY2026E earnings. Wipro, on an average, has

underperformed on revenue growth by 5 per cent versus Infosys and HCL Tech on organic constant currency (CC) basis in the past 10 years and the underperformance has continued under the current CEO’s tenure with the reduction in gap in FY2021 and FY2022 offset by the increase during the past couple of years.

"Forecast significant growth underperformance in FY2025 and FY2026 as well Wipro faces multiple challenges, both internal and external, which have created headwinds to growth. Attrition in key management personnel is elevated and not a good sign in later years of turnaround effort," Kotak said.

The domestic brokerage said that the mega deal announcements have been muted. Kotak said a list of mega deals announced in public domain by peers in FY2024 suggests Wipro has high exposure to the consulting portfolio, which did not work in its favour in the past, although it may benefit to some extent in case of a recovery.

"We believe Wipro is susceptible to share losses in vendor consolidation events on a net basis. We estimate modest 3.6 per cent dollar revenue CAGR in FY2024-26E. Revival in BFSI alone may not be enough to close gap with peers Wipro’s woes in FY2023 and FY2024 are not limited to BFSI alone where it has high consulting exposure," it said.

Besides, verticals ex-BFSI have also struggled, notably manufacturing where peers have done much better. The path to recovery in ex-BFSI verticals is uncertain, Kotak said adding that Europe is another segment where performance is weaker than expected, given high investments in the region via Capco acquisition and local leadership hires.

"We prefer reasonably valued stocks with consistent execution and ability to cater to both discretionary spending and cost take-outs. Any recovery in discretionary spending can be played equally well or better in our ADD/BUY rated Tier 1 stocks—Infosys, TCS and HCL Tech that have better growth and RoIC profile," it said.

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