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Sell Wipro Ltd For Target Rs.365

While revenue growth was in-line, EBIT margin was slightly ahead of our estimates. Growth was fairly broad based across key geographies and most verticals. Share of offshore revenue, gross utilisation and IT attrition (TTM) witnessed sequential uptick. Large deal TCV (US$1.4bn vs US$1.2bn in Dec-20) was healthy and the management indicated its composition is skewed towards new deals (vs renewals).

Prima facie, Wipro’s recent focus on large deals seem to be bearing fruit. However, the sustainability of this large deal momentum is yet to be seen. Adjusted for Metro AG’s contribution (+1.3% QoQ, our estimate), company’s Jun-21 growth guidance of 0.7%-2.7% QoQ (CC) was softer than expectations. Ex-Capco EBIT margins are expected to remain in a narrow band (vs pre-Covid margins, ~19%).

As we rebase our exchange rate assumptions, our FY22E EPS witnesses 4-5% upgrade. Stock is currently trading at 1-yr fwd P/E of ~22x. The ~70% rerating over LTM (vs pre-Covid long-term averages) more than prices-in the potential turnaround / revenue growth convergence with TCS / Infosys / HCLT. Incrementally, given the higher likelihood of misses (vs surprises) and lofty valuations, we retain our SELL rating.

* In-line revenue. Slight beat on margins. IT Services’ Revenue growth (3% QoQ, CC) was largely in-line with estimates. Growth was fairly broad based across key geographies like Americas 1 (+3.5% QoQ, CC), Americas 2 (+4% QoQ, CC) and Europe (+3.7% QoQ, CC). Except health (-2.9% QoQ, CC), manufacturing (-1.1% QoQ, CC) and communications (-0.4% QoQ, CC), other verticals delivered strong growth.

* Share of offshore revenue increased sequentially, on expected lines. EBIT margin of 21% (IT Services) was 50bps ahead of our / consensus estimates. The company rolled out wage hikes to 80% of its employee base. Apart from wage hike impact, utilisation increase and INR appreciation were other margin movers.

* Healthy deal wins with a skew towards net new; Jun-21 guidance is soft. Large deal TCV (US$1.4bn vs US$1.2bn in Dec-20) was healthy and the management indicated its composition is skewed towards new deals (vs renewals). Adjusted for Metro AG’s contribution (+1.3% QoQ, our estimate), company’s Jun-21 growth guidance of 0.7%-2.7% QoQ (CC) was softer than expectations. Ex-Capco EBIT margins are expected to remain in a narrow band (vs pre-Covid margins, ~19%).

* As we rebase our exchange rate assumptions, our FY22E EPS witnesses 4-5% upgrade. Stock is currently trading at 1-yr fwd P/E of ~22x. The ~70% rerating over LTM (vs pre-Covid long-term averages) more than prices-in the potential turnaround / revenue growth convergence with TCS / Infosys / HCLT. Incrementally, given the higher likelihood of misses (vs surprises) and lofty valuations, we retain our SELL rating on the stock.

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