Wipro Q4 Review: Analysts Cut Target Prices On Margin Woes
Here's what analysts have to say about Wipro's Q4FY22 results.
Analysts cut Wipro Ltd.'s earnings forecast and expect its margin to narrow in the ongoing fiscal on account of persisting supply-side challenges such as attrition, higher-than-usual salary hikes and an increase in travel and other discretionary costs.
The IT company saw its revenue increase 2.7% sequentially in the three months to March, meeting estimates. Its revenue from IT services jumped 3.1%. But the company's margin contracted 130 basis points.
Wipro Q4 FY22 Highlights (QoQ)
Net profit rose 3.98% to Rs 3,087.3 crore, compared with the Rs 3,005-crore estimate.
EBIT fell 4.82% to Rs 3,402.9 crore.
12-month trailing attrition rate rose to 23.8% from 22.7% at the end of the third quarter.
Wipro expects 1-3% sequential revenue growth, translating into 16-18% year-on-year basis in constant currency. “We expect to grow in double digit for FY23 as well. We have grown over 3% continuously in the last six quarters,” said Thierry Delaporte, managing director and chief executive officer.
Margin, he said, are expected to grow at 17-17.5% in the medium term. “For the next two-three quarters, however, we will see slightly lower margin because of the investments we have made.”
The analysts also cut target prices for the software services company, assuming a decline in margin.
Of the 45 analysts tracking the company, 21 maintain a 'buy', 14 suggest a 'hold' and 10 recommend a 'sell', according to Bloomberg data. The average of the 12-month target price implies an upside of 17.4%.
Shares of Wipro fell nearly 3%, logging the worst day in two weeks. The stock has shed over 30% so far in 2022 compared with a 20% drop in the Nifty IT index. Wipro is among the worst performers the IT gauge.
Here's what analysts have to say about Wipro's Q4 FY22 results.
Morgan Stanley
Maintains 'overweight/In-line', reduces target price from Rs 690 to Rs 640, still an implied return of 25.79%.
The company's March-quarter performance was mixed compared to expectations.
Its guidance for the quarter ending June was weaker than expected.
Maintains forecast of 11% YoY organic growth in constant currency in FY23.
The company's commentary on demand environment, pipeline and order booking remains robust.
Its assessment that the macro volatility has not had an adverse impact, even in Europe, bodes well.
Cuts 80 bps in IT services margin to price in company's assessment that margins would be below the 17-17.5% band over the next two-three quarters, due to supply-side investments.
Lowers FY23 and FY24 EPS estimates by 7% and 4%, respectively.
As Wipro's growth should lag peers' in near term, its valuation discount to Infosys could remain wide until growth picks up.
Nomura
Maintains 'buy', cuts target price from Rs 730 to Rs 690, still an implied upside of 35.61%.
BFSI, manufacturing and technology segments drove growth.
The company's revenue growth guidance for quarter ending June is below our expectation of 2-4%.
Expects dollar revenue growth of 13.5% in FY23F (including 2% from the recent acquisition—Rizing).
Expects the company's EBIT margin to remain under pressure due to supply-side challenges such as attrition, higher-than-usual salary hikes, increasing freshers hiring programme.
The company's total contract value of $2.3 billion in FY22 indicates healthy deal pipeline, while client metrics continue to improve.
Expects overall EBIT margin of 17% in FY23F.
Lowers FY23-24E EPS and target price by 6% due to lower EBIT margin assumptions.
Key Risks: Weaker-than-expected revenue growth, margin weakness due to labour costs.
Kotak Institutional Equities
Maintains 'reduce', cuts target price from Rs 595 to Rs 520, still an implied return of 2.2%.
Revenue growth guidance for quarter ending June was muted due to weak deal signings.
Low margin, high costs due to large acquisitions to augment capabilities are areas of concern.
All verticals grew at a reasonable rate except for healthcare and communications segments in quarter ended March.
Expects organic revenue growth to moderate to 10.4% in FY23E compared to 14.2% in FY22.
Forecasts 50 bps decline in EBIT margin in FY23E after a 280-bps decline in FY22.
Attributes the decline in acquisition costs, compensation revision and increase in travel and other discretionary costs.
Cuts FY2023-24E EPS by 3% due to lower revenue growth assumption, 30 bps dilution from Rizing acquisition and competition, travel costs.
The turnaround initiatives of Delaporte are yield results, but Wipro's underinvestment in the past requires correction.
Nirmal Bang
Maintains 'accumulate' and reduces target from Rs 571 to Rs 501, an implied return of -1.53%.
Wipro's underperformance stems from increasing doubts over the turnaround story after two quarters of average QoQ growth in both Q3 and Q4 of FY22.
The promise of 'profitable growth' has been dented with margins being reset downwards quite a few times.
Believes that FY23 revenue growth guidance is palatable, but margin guidance is disappointing.
Believes clients will tighten IT spending owing to profit pressure from the stagflationary environment.
Lowers estimates for margins by 100bps as well as organic growth by 150bps.
Prabhudas Lilladher
Maintains 'buy' and reduces target from Rs 735 to Rs 616, an implied return of 21.07%.
Believes that the revenue growth guidance for Q1FY2023 was weaker than expected.
Cuts EPS estimates by 7.5% for FY2023/24 led by cut in Ebit margin by 120bps/110bps, due to margin pressures.
Believes that mega deal wins or increase in organic revenue growth guidance from Q2 FY2023 will be the key triggers for the stock.