Wipro’s turnaround is on track but its valuation has run ahead of itself
PremiumWipro is trading at a one-year forward price-to-earnings (PE) multiple of 28 times, shows Bloomberg data
The robust June-quarter (Q1FY22) earnings performance of IT services provider Wipro Ltd is a fallout of its ongoing turnaround strategy.
At 4.9%, its organic sequential constant currency revenue growth exceeded the management’s guidance of 2-4%. Also, Wipro has beat its peers on this parameter. Tata Consultancy Services (TCS) Ltd and Infosys Ltd saw sequential constant currency growth of 2.4% and 4.8%, respectively, in Q1. Inorganic sequential constant currency revenue growth at 12% was the highest in the past 38 quarters. Wipro’s revenue got a boost from the recently acquired entity Capco with revenues of $153 million for two months of the quarter. This was higher than the management’s guidance of $129 million in May.
In Q2FY22, the management targets IT services revenue to be in the range of $2.53-2.58 million, which implies sequential growth of 5-7%. For FY22, Wipro is confident of delivering a double-digit organic revenue growth.
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Wipro’s turnaround strategy deployed in 2020 has started yielding results, but the stock’s expensive valuation multiple leaves little room for disappointment, cautioned analysts. Wipro is trading at a one-year forward price-to-earnings (PE) multiple of 28 times, shows Bloomberg data. Peers TCS and Infosys are trading at valuation multiples of 35 times and 33 times, respectively.
As per analysts at Kotak Institutional Equities, Wipro’s turnaround effort is gaining speed and is on the right track, but valuations already discount this potential and do not provide any margin of safety. Higher exposure to challenged verticals such as healthcare and energy, natural resources and utilities, along with restrictions in India and West Asia operations, has weighed on Wipro’s past performance. Its renewed turnaround strategy is expected to make the organization leaner, aiding its long-term growth.
Also, as part of this strategy, Wipro had outlined that it hopes to match peers on organic growth by FY23 and exceed them by FY24. But analysts have doubts. “There is likely to be a closure of gap between Wipro and its tier-1 IT peer group growth over FY21-24, but we expect Wipro to still lag TCS and Infosys and be at par with HCL on organic growth over FY21-24," said analysts at Ambit Capital Market Pvt. Ltd.
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They said Wipro’s valuations imply around 13.5% revenue CAGR over FY21-31 at 18% Ebit margin, which appear demanding. CAGR stands for compounded annual growth rate. Ebit is short for earnings before interest and tax. Improved growth visibility has led to massive rally in the Wipro stock. In the past one year, it has risen 120% beating the Nifty IT index’s 75% gains. However, for valuations to justify, a lot has to still fall in place.
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