Wipros In-Line Q2 Results Fail To Allay Analyst Concerns On Growth, Margin

Shares of Wipro Ltd. hit a 52-week low after the firm's second-quarter deal pipeline and in-line earnings failed to offset analyst concerns about weak growth guidance and margin pressures.

Here's what brokerages made of Wipro's Q2 results:

Motilal Oswal

Maintains 'neutral' stance at a target price of Rs 380, implying a potential downside of 7%.
Disappointed by weak Q3FY23 revenue growth guidance. Though the management blamed this on macro uncertainty and geopolitical issues, it said that it has started to see a slowdown in the consulting business, although the same was partially compensated by cross-selling in services.
Concerned about the vulnerability of consulting due to its early cycle nature. The low employee addition in Q2 also adds to the near-term growth concerns.
Factoring in a FY22-24 USD revenue CAGR of 7.8% – the weakest in our Tier-I IT services coverage.
On track to deliver a 230 basis point drop in EBIT margin in FY23 (excluding a one-off impact in Q2 due to the restructuring in Europe), which inhibits the management’s ability to focus on growth.
Expect Wipro to stay meaningfully behind its 17-17.5% medium term IT Services’ EBIT margin guidance over the next two years. With the consulting business slowing down, risk to profitability from a weakness in Capco continues to rise and may force Wipro to choose between scaling up the vertical and margin.
Maintain stance as we await further evidence of the execution of WPRO’s refreshed strategy, and a successful turnaround from its growth struggles over the last decade before turning more constructive on the stock.

Dolat Capital

Maintains 'reduce' rating with a target price of Rs 420, implying a potential upside of 3%.
Nature of deal pipeline remains very healthy but the management is confident/certain only on third of these deals. Consulting volumes are down as is the case in all cycles but for Wipro, its Capco unit is still driving cross-sell synergies for other services units.
Third quarter guidance at 0.5%-2% indicates lower confidence on business performance and visibility.
Wipro is confident on its deal wins and pipeline but is factoring potential furloughs impact in H2 in its outlook.
Wipro's investments includes acquisitions, investments in operational excellence, efficiency in marketing, and fresher training/talent. Some of these investment are ambitious but are needed (long due).
Given slightly better growth performance and rupee depreciation in second quarter, we have scaled up our growth estimates for FY23/FY24 by 1.1%/2.3%, respectively.
But factoring in weak margin performance overall as well as for IT services we have toned down our estimates for FY23/FY24 by 40bps/64bps considering weakening growth and return to office costs.

Nirmal Bang

Maintains 'sell' rating at a target price of Rs 340, implying a potential downside of 17%.
While revenue growth is strong, the margin expansion of 10bps was underwhelming and the sense we get is that in the second half of FY23, both revenue growth and margins are going to come in weaker than our/street estimates despite optically strong TCV growth.
The weak EBIT margin expansion hints that it will not materially pick up in Q3 (due to incremental two months of compensation increase) indicates that the 17-17.5% aspirational target may remain elusive even in FY24 considering the pressures on both demand as well as on the pricing front in that year.
Levers for margin improvement going into FY24 include utilization, pyramid improvement - due to aggressive fresher addition, reduction in attrition and SGA leverage.
While pricing came to the rescue in 2QFY23 and may be of help in 3QFY23 too, we believe this may become a headwind in FY24 considering the macro set up.

IDBI Capital

Maintains 'hold' rating at a target price of Rs 425, implying a potential upside of 4%.
Margins to remain key overhang in near term. The company’s focus on growth, acquisition to bridge capabilities, investments, wage hike and higher travel cost will dent margins in near term. Hence, we expect 162 bps dip in FY23E margins to 15.3% and thereafter to increase to 17.4%.
Due to slowdown in consulting revenues and challenges in Europe (especially in manufacturing and retail), we remain cautious on the revenue growth trajectory.
Revised our revenue estimates downwards by 2.6% and 5.9% in FY23 and FY24.

Nomura

Maintains ‘neutral’ rating, cuts target price from Rs 400 to Rs 380, implying a potential downside of 7%.
Margin recovery likely to be gradual; guidance for 3QFY23 is disappointing and alludes to slowdown.
Management guidance of Q3 revenue growth is weak, in our view, and reflects seasonality (furlough) and demand uncertainty.
Downside risk includes: weaker translation of deal wins into revenue growth.
Upside risk includes: higher than expected margin expansion.
Prefers Infosys in the space.

Kotak Institutional Equities

Maintains ‘reduce’ rating at a target price from Rs 415, implying a potential upside of 1.7%.
Revenue growth guidance was muted despite strong deal wins and captures moderation in consulting and some bit of caution baked in for a deteriorating macro.
Wipro will have to deal with more challenges in a slowdown given it is in the midst of a turnaround journey, has higher discretionary exposure and additional effort on integration of acquisitions.
Maintain margin estimates and believe it will improve in FY2024E though a return to aspired 17%+ margin will take far longer.
We believe Wipro will underperform peers on revenue growth over the next three years by 2-4%.

Phillip Capital

Maintains ‘neutral’ rating at a target price from Rs 390, implying a potential downside of 4%.
Revenue growth and margins were both soft, but broadly in line with expectations. Q3 revenue growth guidance was disappointing.
EBIT margins of 15% in H1, with two months of wage hike impact yet to come (in Q3), means the company will not be able to report margins much above its declared floor of 15%.
Over the last eight quarters, Wipro’s margins have fallen by over 600bps, primarily due to acquisitions like Capco and Rizing, which have led to a big reset at gross margin levels.
All that has not led to any significant outperformance on the growth front – as Wipro appears likely to report, below industry average growth in FY23.
The commentary on demand environment (esp Europe) remained cautious. Overall, we do not see any trigger in Wipro stock that might lead to its rerating, after the sharp correction. Inexpensive valuations and high dividend yield limit the downside potential of the stock.