Excited about Wipro’s stock? Beware, it faces challenges galore

Shares of IT services company Wipro Ltd have rallied nearly 20% in the past six months, beating the Nifty IT index. This is surprising, considering Wipro is facing a double-whammy of internal and external issues.

To start with, global demand uncertainty on discretionary technology spending, mainly among crucial banking, financial services and insurance (BFSI) clients, has hurt the industry’s revenue visibility. But Wipro’s own problems are also clouding its growth outlook.

For one, its turnaround efforts are yet to have a meaningful impact on revenue growth. There is high attrition among the top management. Finally, large deal announcements have been muted of late.

“Wipro’s woes in FY23 and FY24 are not limited to BFSI, where it has high consulting exposure. [Other] verticals have also struggled, notably manufacturing, in which its peers have done much better,” said analysts at Kotak Institutional Equities. In the December quarter (Q3FY24), five of the seven reported verticals saw a drop in revenue growth. Among geographies, its performance in Asia Pacific and Middle East, and Africa and Europe was not encouraging. Among other parameters, the falling share of revenues from its top 5 and top 10 clients pointed to increased revenue pressures.

Against this backdrop, Wipro’s subdued Q4 guidance of -1.5% to 0.5% sequential constant-currency revenue growth in IT services captures the cautious mood. Even so, expectations of an interest rate cut by the US Federal Reserve in 2024 has caused Indian technology stocks to rally despite global IT companies not yet seeing a material improvement in demand.

On the bright side, the latest management commentary points to green shoots in the consulting business, to which it has exposure through Capco. Cost-optimization measures have aided sequential margin expansion in Q3. But these few positives aren’t enough to justify the stock’s rally.

“Although we see signs of gradual improvements, Wipro is set to report a year-on-year decline in its top line for FY24–significantly below peers. We expect Wipro to underperform its peers, primarily due to the low correlation between its deal wins and top-line growth. The pain is accentuated by continuous top-level exits,” said Vibhor Singhal, director, equity research, Nuvama Institutional Equities.

Meanwhile, on the valuation front, Wipro is trading at 22 times its projected FY25 earnings, showed Bloomberg data. This is a discount to its larger peers Tata Consultancy Services and Infosys, but does not offer comfort in the current scenario.

There is high attrition among top management. Large deal announcements have been muted of late