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TCV provides visibility for FY24; revenue conversion to be key

About the stock: Wipro is an IT, consulting & BPO player catering to BFSI, health, consumer, energy & utility, technology and communication.

* With over 230000 employees, it serves clients across six continents

* Consistent payout (~70%), healthy OCF to EBITDA ratio of ~89%

Q3FY23 Results: Wipro reported weak Q3 results on the revenue front.

* IT services grew 0.6% QoQ in CC terms and 0.2% QoQ in dollar terms

* IT services EBIT margins improved 120 bps QoQ to 16.3%

What should investors do? Wipro’s share price has grown by ~1.6x over the past five years (from ~| 245 in January 2018 to ~| 393 levels in January 2023)? Reported TCV of US$4.3 billion (bn), up 26% YoY

* We change our rating on the stock from HOLD to BUY

Target Price and Valuation: We value Wipro at | 455 i.e., 16x P/E on FY25E EPS

Key triggers for future price performance:

* TCV for the quarter was at US$4.3 bn. Sustainability of the same in the subsequent quarters will likely provide revenue visibility for FY24

* The company announced key leadership changes in focus areas of America 2, Middle East, Japan & Australia and will likely provide a fillip to revenue growth in the regions

* Higher penetration in Europe, client mining, acquisition of new logos and traction digital revenues to further boost revenue growth

Alternate Stock Idea: Besides Wipro, in our IT coverage we also like TCS.

* Strong organic growth, consistent financials, industry leading margins and healthy capital allocation policy prompt us to be positive on the stock with a BUY rating and a target price of | 3,780

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