Analysis: Wipro shows some spark on buyback offer but what lies ahead?

Shares of Wipro rallied as much as 3.6 per cent to Rs 388 apiece on the BSE and were the top Sensex gainer in the morning deals on April 28, a day after the company released its Q4FY23 numbers as well as announced its share buyback scheme. While the buyback is expected to support the price in the near term, its FY24 organic growth is seen to be one of the lowest among Tier-1 IT services peers. Its margin is also seen below the management’s medium-term guided range of 17.0 per cent -17.5 per cent.

A lag in the conversion of total contract value (TCV) wins due to longer transition in vendor consolidation, macro uncertainty, lower discretionary spending (in BFSI & Hi-Tech) and delay in decision-making are expected to impact revenue growth, analysts note. However, Wipro's large order book bodes well for growth once demand turns. Additionally, Wipro, as per JM Financial, is doing better on margin management vs peers as well (flat QoQ and guidance of maintaining margin), albeit at a lower starting point. 

"A weak 4Q and soft 1Q guidance flows into our estimates resulting in 3-4 per cent cuts in our FY24-25E US dollar revenue and 6-7 per cent cuts to our PAT. However, buyback (and resulting lower equity base) broadly nullifies the impact on EPS. We lower our target multiple to 16x (from 18x) – in line with cuts for other large peers (INFO/HCLT). We maintain BUY with a revised target price of Rs 450 (from Rs 480)," the brokerage wrote in its earnings review note.

Meanwhile, Motilal Oswal notes that the large buy-back program will deplete a significant portion of the Cash and Investments of the company and may hit its ability to maintain payout over FY24/25E. It has lowered FY24E/FY25E EPS by 7.2 per cent /4.4 per cent to factor in weaker FY24E growth due to a lower exit rate in 4QFY23 and muted 1HFY24. The brokerage maintains a "Neutral" rating on the stock. The target price is set at Rs 360, which implies 14x FY25E EPS.

EPS stands for earnings per share. EPS shows how much money a company makes for each share of its stock and is a most-common used metric for estimating corporate value. 

IDBI Capital says that going forward, levers like higher utilisation, pyramid rationalisation, re-allocation of resources to Time and Materials (T&M) from fixed contracts and lower lateral hiring will drive margins. "However, lower revenue growth and drag from consulting prompt us to keep margins flat for FY24E (at 15 per cent) and then improve to 16 per cent in FY25E." The brokerage expects Wipro's revenues to grow at a compound annual growth rate (CAGR) of 5.3 per cent over FY23-25E. It maintains a 'HOLD' rating on the stock with a revised target price of Rs 420 (PE of 16x on FY25E EPS).

Nirmal Bang Securities is bearish on the stock and says that "the worst on the macro front is ahead of us and not behind us". Hence, a 2HFY24 recovery in growth seems unlikely. "4QFY23 QoQ CC IT Services revenue decline of 0.6 per cent was along expected lines. The EBIT margin was flat QoQ in IT Services and fell below our expectations. Margin guidance for FY24 is that it would stay ~16-16.5%. BFSI and Technology have been two verticals which seem to be causing the growth pain," the brokerage notes. 

It further said that weak growth guidance for 1QFY24 is not just because of cautious customer behaviour, but also due to the added issue of productivity concessions kicking in for some large clients (as has been the case normally). Analysts at the brokerage believe that if customers are behaving in this cautious fashion when the US macro is reasonably resilient, it believes things will only get worse when there is a shallow recession (its base case) sometime in CY23. "Post 4QFY23, we cut our revenue estimates by 3 per cent across FY24-FY26 and trim our margin estimates, leading to a 4-5 per cent cut in PAT," it adds.

The brokerage has a "Sell" rating on the stock with a target price of Rs 350.