Wipro: Investors should await growth outperformance, margin gains

Wipro was lagging its peers in the past on the back of muted revenue growth, falling margins, loss of market share in deal renewals and pricing pressures

The stock of Wipro, the best performing tier-I information technology company over the past six months, was down close to 7 per cent on Wednesday. 

The Street believes that Wipro’s risk-reward trade-off might have turned unfavourable, given the sharp gains and higher valuation.

Suyog Kulkarni of Reliance Securities believes that the decline in the stock, which has gained over 40 per cent year-to-date, suggests an adjustment of risk-return trade-off from investors, considering its elevated valuation. 

At 19.2x its one-year forward estimates, the stock is not only trading at valuations that are the highest in 13 years, but is also at a 30 per cent premium to the five-year average. 

Some brokerages believe that the stock lacks further rerating triggers. Analysts at Goldman Sachs, who have assigned a ‘sell’ rating, say with the buyback support behind, the stock is expected to rerate lower, reflecting its weaker growth fundamentals compared to peers and worries that it might lose market share to larger firms like TCS and Infosys. 

While Wipro reported improved margins and revenue growth, brokerages are waiting for gains from the recent change in strategy. Motilal Oswal’s Mohit Sharma and Heenal Gada are neutral on the stock as they await further evidence of Wipro’s execution of the new strategy and a successful turnaround from its growth struggles over the past decade.  

Wipro lagged behind its peers in the past because of muted revenue growth, falling margins, loss of market share in deal renewals and pricing pressures. 

Its margins before interest and taxes had contracted to 15.5 per cent at the end of FY18, compared with 24.5 per cent at the beginning of FY15. 

Higher exposure to verticals such as healthcare as well as restructuring of operations had impacted revenue growth for the firm. 

While the September quarter margins of 19.1 per cent — led by operational efficiencies and sequential growth outlook in constant currency for December quarter of 1.5-3.5 per cent — are positive, investors should await growth outperformance compared to peers and further margin gains before considering the stock.