Wipro shares at Rs 350 or Rs 470? Analysts decode mixed Q3 results

Wipro's December quarter earnings were a mixed bag, with margins and deal wins beating Street expectations, but revenues and the revenue guidance for March quarter coming in lower than analyst estimates. Following the quarterly results, a few analysts raised their FY23 EPS projections marginally, but cut FY24 estimates to pencil in weaker growth in FY24. Net-net, analysts stayed ‘Neutral’ on the stock.

Nuvama Institutional Equities said Wipro reported robust deal flow in the last few quarters, but the same has not translated into revenue growth – the primary reason for its underperformance. This brokerage has a target of Rs 430 on the counter.

"While we see strong sustainable demand (transformational/cost-takeout deals) driving growth for the sector – Wipro is likely to underperform peers, primarily due to intriguingly low correlation between its deal wins and top-line growth. Inexpensive valuations limit the downside potential," Nuvama said. 

Nirmal Bang raised similar concerns. It said revenue growth guidance was weak in the context of total contract value (TCV) in December quarter being at the highest level in Wipro's history. While the IT firm reported record bookings, conversion to revenue is a concern, the brokerage said.

With 50 per cent of the TCV linked to the cloud, the deal tenures are longer, Nirmal Bang said.

"Post 3QFY23, we have raised our margin estimates by 100 bps across FY24-FY26, leading to an increase in EPS estimates by 4-5 per cent. We have largely maintained our below-consensus dollar revenue estimates for FY24-FY26. We maintain our target PE multiple at 13.9 times on September 2024E EPS to arrive at a target price of Rs 347," Nirmal Bang said.

Motilal Oswal raised Wipro's FY23 and FY25 EPS estimates by 4 per cent  each, but lowered its FY24 EPS estimate marginally to factor in weaker growth next year due to a lower exit rate in March quarter.

"We were disappointed by Wipro's weak implied 4QFY23 revenue growth guidance, given the continued strength in deal momentum over the last few quarters. Management indicated that near-term deal conversion was affected by slower decision-making and a longer tenure (4-5 years) of transformation deals, especially the ones with hyperscalars (44 per cent contribution of the total TCV," Motilal said while suggesting a Neutral stance on the stock, as it views the current valuation as fair.

Emkay Global said Wipro's margins came in above estimates, but Q3 revenue and Q4 growth guidance missed its expectations. Revenue growth in the December quarter was impacted by furloughs, softness in discretionary spending, and delay in deal ramp-ups and revenue conversion because of macro uncertainties, it said.

"Wipro has guided -0.6 per cent to 1 per cent QoQ CC revenue growth in IT services for Q4, below our estimates, factoring in softness in discretionary spending and slower revenue conversion due to prevailing macro uncertainties. IT services’ EBIT margin grew 120 bps to 16.3 per cent in Q3, 80bps above our expectations, and is likely to serve as a base for margins and gradual improvement. We cut our earnings by 1 per cent for FY23E-25E post Q3 performance," it said while suggesting a target of Rs 470 on the stock.

Reliance Securities has upped its price target marginally to Rs 460  from Rs 455, valuing Wipro at a revised P/E multiple of 17 times FY25E earnings.

Triggers for the stock

ICICIdirect, which has a target of Rs 455 on the stock, said  TCV for the quarter came in at $4.3 billion and that a sustainability of the same in the subsequent quarters will likely provide revenue visibility for FY24.

The company announced key leadership changes in focus areas of America, Middle East, Japan & Australia, which will likely provide a fillip to revenue growth in the regions, ICICIdirect said.

Besides, higher penetration in Europe, client mining, acquisition of new logos and traction digital revenues to further boost revenue growth, ICICIdirect said while suggesting a target of Rs 455 on the counter.

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