Wipro Rating- Reduce - Margins slip to a record low

Wipro Rating: Reduce | Margins slip to a record low

Wipro reported an all-round weak quarter with significant miss on revenues, margins and earnings. OCF generation was negligible. The only positives were robust deal wins and strong headcount addition. We cut FY2023-25E revenue growth assumption by ~1% and EPS by 7-10%. We cut Fair Value to Rs 410, valuing the stock at 18X FY2024E EPS. Maintain Reduce. Wipro is more vulnerable than peers in a slowdown courtesy of additional challenges of turning around a business and enhanced exposure to discretionary businesses due to recent acquisitions.

Weak organic growth; margins fall 200 bps q-o-q to historic lows: Revenue of $2.4 bn grew 0.5% q-o-q and 13.3% y-o-y in reported terms. Sequential c/c growth of 2.1% was 70 bps below our estimate. We estimate inorganic contribution at 1%, implying weak organic q-o-q growth of 1.1%. IT services EBIT margin fell 200 bps q-o-q (280 bps y-o-y) to historic lows of 15%, a shocker noting there was no wage revision. Management attributed the sharp decline to—(1) 130 bps from decline in utilisation rates (310 bps q-o-q), higher subcon charges and internal IT investments, (2) 20 bps hit from Rizing acquisition and (3) 50 bps from increase in travel costs. Higher tax rate (23.6% compared to 16-17% in Q1FY22 and Q4FY22 due to tax reversals) and lower other income made for a worse comparison at net profit level. Net profit fell 17% q-o-q and 20.7% y-o-y to Rs 25.6 bn and was 14.7% lower than our estimate.

3-5% revenue growth guidance for September 2022: Embedded in 3-5% q-o-q revenue growth guidance for September 2022 quarter is ~150 bps contribution from Rizing acquisition. Supporting good guidance is $1.1 bn of TCV of large deal wins (size above $30 mn), representing y-o-y growth of 53.8%. Our revenue estimates are largely unchanged with positive guidance offset by revenue miss in June 2022 quarter.

Cut FY23-25EPS by 7-10%: We cut FY2023-25E revenue estimates by ~1%. We bake in sharp miss on margins, leading to 7-10% cut in EPS estimates. Retain Reduce at revised FV of Rs 410.