Wipro: Prospects bright on bettermargins
But analysts cautious on valuations, given muted near-term growth
Shares of Wipro have been hitting their 52-week highs, given the ongoing buyback offer, recent order wins and earnings upgrades, as the turnaround plan has started to gain traction. But, further gains may not come easily.
The stock has gained about 15 per cent since mid-July. The buyback price at ~320 was at a premium of 19 per cent from the date of announcement. Now, this premium has reduced to just 7.3 per cent, and with the buyback closing on September 15, activity in the counter may also subside.
Second, analysts say the key trigger for the stock would come from consistent revenue growth and improved profitability.
Wipro has surprised with a better-than-expected operating profit margin in the June quarter despite currency headwinds, higher costs due to protectionist measures, aided by operational efficiencies (higher utilisation, lower headcount and delayed wage hike). Restructuring of operations has also helped.
Analysts Kawaljeet Saluja and Jaykumar Doshi at Kotak Institutional Equities said the company’s turnaround plan was gaining credence with an improvement in growth from financial services, better account mining and early success in large digital programmes. In the financial services space, Wipro’s clients have robust financials and there is no incremental threat of its clients setting up software development facilities in-house. This, coupled with, consolidation-led deals and new account wins hold Wipro in good stead. Because of its acquisitions in the digital space and design capabilities, the company has won large digital programmes in the financial services space. If it can replicate the same in other verticals, it will help in the turnaround, Kotak’s analysts said. Financial services account for 27 per cent of its revenues.
But not all analysts are convinced. Those at HSBC, who have a ‘reduce’ rating for the stock, highlight that upsides to the stock would depend on its execution, ability to win large deals and mining of its existing clients on a consistent basis.
The cautiousness also stems from expectations that the near-term growth is likely to be muted. The company has guided for constant currency growth in the -0.5 to 1.5 per cent band for the September quarter. The management indicated that the growth would match those of peers only from the March quarter of FY18, while maintaining the revenue target of $15 billion and margins of 23 per cent for 2020.
In the past few years, Wipro’s attempts to push up its growth rates have not yielded the desired results. It will be interesting to see if it can do it this time and live up to the guidance.
For now, the stock (at ~298.25) is trading at 16 times its FY18 earnings estimates, which, given the multiple near-term uncertainties, is on the higher side.