Wipro Q2 Results: Shares Hit A Record As Brokerages Raise Price Targets

Wipro Ltd.'s shares rose to a record after the company's September quarter earnings beat estimates.

Analysts raised their target prices citing broad-based revenue growth, healthy large-deal intake, unprecedented demand environment, especially for new-age services like cloud, as the key reasons for raising the target prices.

However, softness in total contract , rising attrition which is expected to prolong for a few more quarters, return of discretionary costs and weak operation cash flow generation remain key risks.

Shares of Wipro rose as much as 10% to Rs 739.85 apiece in intraday trade on Thursday, before paring gains to close 5.30% higher at Rs 708.25.

Of the 50 analysts tracking the stock, 21 have a 'buy' rating, according to Bloomberg data. 16 recommend 'hold', while the remaining 13 recommend 'sell'. The 12-month Bloomberg consensus target price indicates a downside of around 7% from current levels.

Motilal Oswal

• Maintains 'neutral' rating with the target price increased to Rs 710 from Rs 650 earlier, with an implied upside of 5.56%.

• Revenue growth in IT services and organic growth exceeded our estimates.

• EBIT margin in information technology services remained little changed on a sequential basis despite mergers and acquisitions impact and wage hike.

• Company's management expects attrition to increase further in the December quarter.

• Company's Q3 revenue growth guidance was in line with our estimate.

• Company's revenue growth guidance as positive, given the supply constraints and seasonality.

• Continue to remain watchful on margin.

• Expect FY22 IT services revenue growth of 28% YoY.

• Raised FY22/FY23E EBIT margin estimate by 100 bps/30 bps, resulting in FY21-23E profit after tax growth of 13%, due to better than expected margin performance.

• Growth strategy, focus on continuously investing in talent, simplified operational model to support valuation.

• Expect the refreshed strategy of the new management to make the organisation leaner.

• Company's growth-focused and client-centric approach are likely to aid growth over the medium to long term.

• Upgrade FY22/FY23E EPS estimate by 7%/2% to account for better growth performance.

Dolat Analysis & Research Themes

• Maintain 'Reduce' with the target price raised to Rs 640 from Rs 520 earlier, an implied downside of 4.85%.

• Company delivering impressively on growth since the induction of Thierry Delaporte as CEO.

• Large deal wins and strengthening of leadership have been the key drivers of growth.

• Two acquisitions have progressed better than anticipated.

• Upgraded revenue estimates by 2%/5% for FY22/FY23E, given the strong growth performance, robust sequential guidance and sustained commentary on growth outlook.

• Reduced operating margin estimates for FY23E by 16 basis points to account for supply-side led factors.

• Expect revenue growth of 3.2% in cash credit terms in dollar basis in December quarter, led by traction across verticals and Capco-led go-to-market strategy for banking and financial services clients.

• Operating margins should decline by 26 basis points quarter on quarter due to partial wage hike impact and reinvestments in talent.

• Believe Wipro and other tier 1 IT companies would deliver strong revenue momentum over 4-5 quarters.

Key Risks

• Softness in total contract wins remain an area of concern.

• High attribution can lead to rise in hiring cost, sub-contracting cost and even restrict growth.

• Return of discretionary cost like travel cost is likely to add to margin woes.

Emkay Global

• Maintain 'hold' with the target price increased to Rs 680 from Rs 600 earlier, an implied return of 1.1%.

• Broad-based revenue growth, healthy large deal intake and in-line Q3 guidance are positive indicators.

• IT services revenue growth of 6.9% quarter over quarter was above our estimates.

• IT services EBIT margin declined 10 basis points QoQ as revenue momentum and operational efficiencies offset the impact due to wage hikes and investment in sales and talent.

• Deal pipeline close to an all-time high and includes a good mix of small, mid-sized and large deals.

• Integration of Ampion boosted the performance of Asia Pacific/Middle East/Africa market, while Capco boosted the performance of America and Europe market units.

• Company witnessing strong demand for new-age services like cloud, digital transformation, cyber security and data analysis.

• Revenue from top clients grew 25% YoY, top 5 clients grew 35% YoY and top 10 clients grew 33% YoY.

Key Risks

• Operating cash flow generation remains a concern with the company generating 56% OCF/EBITDA in September quarter.

• Voluntary TTM attrition rate rising to 20.5% in Q2 from 15.5% in Q1 is another area of concern.

Phillip Capital

• Upgrades to 'buy' from 'neutral', with the target price raised to Rs 780 from Rs 730 earlier, an implied upside of 16%.

• September quarter performance was significantly better than expectations.

• Q3 guidance was 'decent', given the seasonal impact of holidays.

• Company set to report 25% growth in FY22, its best performance over the last decade by far.

• Company's valuation fair as it trades at 5% discount to Infosys and 15% discount to TCS.

• Outlook remains bright and remain convinced about the Wipro turnaround story.

• The IT sector is at the cusp of unprecedented demand environment, triggered by compressed digital transformation.