Q2FY24 Review: Wipro: Weak quarter, weaker guidance

19 Oct 2023 , 12:28 PM

Wipro (WPRO) reported Q2 revenue decline of 2% cc QoQ, below IIFLe of -1%, due to broad-based weakness across verticals. At 16.1%, IT services Ebit margins were broadly flat QoQ and in line with IIFLe. Deal wins for the quarter were healthy with a TCV of USD3.8bn (+7% cc YoY), driven by nine-quarter-high large deal TCV of USD1.3bn (+79% cc YoY). WPRO guided for Q3 revenue decline of -3.5% to -1.5% cc QoQ, below IIFLe of 0-2%, which management indicated is a reflection of macro challenges and higher-than-usual furloughs in Q3. WPRO continues to face heightened challenges in revenue growth vs peers; analysts of IIFL Capital Services now expect growth divergence to widen vs peers. Analysts of IIFL Capital Services reduce their FY24-26 EPS estimates by up to 6%, while their 12-month TP is reduced to Rs360 (was Rs380), pegged at 14x 2YF EPS. WPRO trades at 17x FY25 P/E, at 15% discount to large-cap peers – which analysts of IIFL Capital Services believe can widen, given the weaker growth profile. Maintain REDUCE.

Third-straight quarter of revenue decline: 

Revenue declines were broad-based across verticals – Communications (-8.1% cc QoQ), Energy (- 6.1%), Mfg (-5.8%), BFSI (-3.1%) and Consumer (-2.6%), while Tech (+5.1%) and Health (+1.3%) were stable. Management said growth in Q2 continues to be impacted by cut in discretionary spending; Q3 is expected to be impacted by higher-than-usual furloughs. TCV of deal wins remained healthy, while large deals TCV at a nine-quarter high. WPRO guided for further deceleration in Q3 with revenue decline of -3.5% to -1.5% cc QoQ. 

Margins steady, may remain range-bound: 

IT services Ebit margins came in at 16.1% (+10bps QoQ), in line with IIFLe. Management expects margins to remain in a narrow range over the near term, despite wage hikes from Dec and weaker Q3. LTM attrition declined for a sixth-straight quarter to 15.5%, while headcount declined for a fourth-straight quarter by 5k, reaffirming weak outlook for the near term. 

Maintain REDUCE on widening growth divergence: 

WPRO is trading at 17X FY25 P/E, at a 15% discount to large-cap peers and offering flat USD revenue over FY23-25. With a weak near-term outlook and limited visibility of acceleration in growth, the stock lacks triggers. Hence, analysts of IIFL Capital Services maintain REDUCE with a 12-month TP of Rs360, pegged at 14X 2YF P/E, offering 12% potential downside. Key risks: pick up in IT spend.