Q1 underperformer Wipro is now a re-rating candidate. Here's why

NEW DELHI: Wipro's flat profit for June quarter did not look promising at first look, but analysts said several factors suggest the IT firm could soon narrow last few years' earnings underperformance against its tier-1 peers.

"Wipro is a re-rating candidate," said analysts, who believe the risk-reward has turned favourable for the IT stock. Going forward, all eyes would be on what strategy Thierry Delaporte, the new CEO, deploys and what roadmap his unveils for future earnings growth, they said.

Wipro stock has risen just 15 per cent in last three years against a 61 per cent rise in Infosys and 81 per cent surge in TCS, thanks to inferior earnings, which was partly led by the IT firm's higher exposure to verticals such as healthcare and ENU (energy, natural resources & utilities), which faced a lot of challenges.

Growth was also hampered by the company's restructuring in India and West Asia, said Motilal Oswal Securities. "However, we see scope for recovery in some verticals such as health BU. Despite the Covid-19 impact, margin resilience and cash generation was impressive this quarter. The management's outlook for maintaining margins within a narrow band should result in strong upgrade in consensus EPS," it said.

Re-rating candidate
Edelweiss Securities has upgraded Wipro to 'buy' from 'hold'. While the brokerage does not expect the company to overcome revenue underperformance over the next few quarters,
it expects growth rates and earnings to accelerate led by the sectoral tailwind.

"We also believe Wipro’s current valuation of 12.5 times FY22E implies a favorable risk-reward over medium to long term," the brokerage said.

Emkay Global said it finds Wipro valuations attractive relative to peers, notwithstanding the long-standing growth challenges which could offer further tactical upsides for the stock. "We now raise Wipro over Infosys in our order of preference amongst Tier-I tech stocks," it said.

This brokerage has raised FY21-23 EPS target for Wipro by 1.4-3 per cent, factoring in higher margin assumptions, even as its revenue estimates remain broadly unchanged.

Motilal Oswal said Wipro is a good re-rating candidate due to chanes of an upside or turnaround under the new CEO, possibility of an impending share buyback and relatively attractive valuations at 13 times one-year forward P/E). But "before turning constructively positive on the stock, we await a refresh of the company's strategy and further evidence related to execution," Motilal said.

Cautious optimism
Wipro recently appointed Thierry Delaporte as its new CEO, who is hoping to finalise a plan to drive improvements across spheres in quest for industry-leading growth. Nirmal Bang Institutional Equities said Thierry, like all new CEOs, is likely to paint a bright future through his strategy roadmap, but it would take 6-8 quarters to know whether he is on the right track in 6-8 quarters.

"In the meantime, Wipro has continued its multi-quarter run of positive EBIT margin growth. Q1FY21 IT services EBIT margin performance overshadowed everything else. While revenue was broadly in line, margin came in 300 bps higher sequentially. This is when we were expecting a gross margin drop because of likely pressure from lower utilisation and lower pricing," Nirmal Bang said.

Q4 results
The IT firm on Tuesday posted a flat 0.11 per cent year-on-year (YoY) growth in net profit at Rs 2,390.40 crore for June quarter compared with Rs 2,387.60 crore reported for the corresponding quarter last year. Consolidated revenue increased 1.33 per cent YoY to Rs 14,913.10 crore in June quarter from Rs 14,716.10 crore in the same period last year. Operating margin in IT services for the quarter stood at 19 per cent, logging a 0.6 per cent YoY expansion. On a YoY basis, the company added five customers in the $20 million-plus revenue bucket.

On Wednesday, the stock soared 10 per cent to hit a high of Rs 247.55 on BSE.