Analyst Corner: Wipro: Maintain ‘buy’ with unchanged TP of Rs 550

By Edelweiss Securities

Wipro delivered another quarter of strong results. IT services revenue grew 3% QoQ (in cc), in line with both our (3.1%) and Street’s (3%) estimates. Operating margin continued to surprise for IT services at 21% (down 70bps QoQ), well ahead of our and Street’s estimates of 19.6% and 20.4% respectively. Management has guided for sequential growth of 2–4% for Q1FY22, largely in line with estimates. TCV of the order book remains strong and grew 33% YoY for H2FY21, the highest TCV ever reported. The pipeline remains healthy too. All in all, we remain optimistic about the demand environment. Maintain ‘BUY’ with an unchanged TP of `550 as we roll over the valuation to Q2FY23E.

After muted growth over the last few years, Wipro has delivered strong results for a third quarter in a row led by a healthy volume growth. After a steep decline in Q1FY21, the company bounced back sharply. And now it has ended FY21 with only a small reported decline of 1.4%. By vertical, health, manufacturing and communications clocked a decline on a sequential basis while technology and consumer segments saw the strongest growth of 9.9% YoY and 6.9% YoY, respectively, in Q4FY21. BFSI saw robust growth of 2.7% QoQ (in cc). By geography, only Asia Pacific Middle East Africa (APMEA) posted a decline on a sequential basis.

Stability across the board. Operating margin at 21% again outperformed expectations despite the company handing out wage hikes to 80% of its employees in January 2021. Wipro plans to give skill-based bonuses and promotions to retain its talent. Operating metrics have shown a consistent improvement with gross utilsation further increasing to 76.7% and offshoring to 54.5%. Attrition rose to 12.1% in Q4FY21 from 11% in Q3FY21. The firm won 12 large deals, resulting in a TCV of $1.4bn. The firm also added more than 18,000 employees in this quarter, including more than 2,850 freshers. Outlook and valuation. On a firm footing; maintain ‘BUY’ Wipro’s turnaround has been led by the strategy of the new CEO, coupled with a strong demand environment. Along with these, improved execution is likely to drive earnings going ahead. Maintain ‘BUY/SN’ with an unchanged TP to Rs 550 (25x Q2FY23E) as we roll forward the valuation to Q2FY23E.