Shares of Wipro tumbled over 3% in Thursday's (October 19) trade following muted September quarter earnings reported by the company on Wednesday, in which the IT services firm clocked the weakest growth among peers. Wipro's disappointing second-quarter guidance reaffirms its troubles with converting deal wins into growth.

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The fourth-largest Indian IT services firm saw its revenue decline for the third consecutive quarter, coming in at $2.7 billion for the second quarter of this fiscal, a fall of 2.3% sequentially, and 2% in constant currency, falling at the lower end of the company's guidance for the quarter.

Wipro guided for 1.5% to 3.5% IT Services revenue decline in the third quarter of FY24. The management expects furloughs in the December quarter, higher than previous years.

EBIT margin in the IT Services business was flat (+10 basis point quarter-on-quarter) at 16.1%. The management is aiming to keep the margin within the range of recent quarters, although, a wage hike in Q3 (two months) will likely make this a tall ask, believe analysts.

Despite a healthy deal pipeline and having delivered a robust deal TCV of $3.8 billion in the second quarter, the conversion remains a challenge in the near term. The third quarter is a seasonally soft quarter, and the management expects the degree of impact from furloughs to be higher than the earlier trend, which led to delivering another quarter of weak topline growth guidance.

The management has indicated that slower decision-making and cuts in discretionary spending should hurt the December quarter. Wipro’s growth was more impacted compared to peers due to higher contributions of discretionary and consulting revenue.

The decline in the first half and Q3 guidance translates to Wipro reporting a YoY decline for FY24 – significantly below peers. Brokerages are not bullish on Wipro, saying the stock's inexpensive valuation and high dividend yield should limit downside potential in the medium term.

"We continue to expect Wipro to underperform peers, primarily due to its intriguingly low correlation between deal-wins and top-line growth. The stock’s inexpensive valuation and high dividend yield should limit downside potential in the medium-term," Nuvama said, retaining its 'HOLD' call on the stock.

Given Wipro's weak September quarter revenue growth and weak Q3 guidance, Motilal Oswal expects its FY24 topline growth to be one of the lowest among Tier-1 IT Services peers, with a margin below the management’s medium-term guided range of 17.0-17.5%.

The brokerage has maintained a 'Neutral' rating on the stock with a target price of ₹418. It awaits further evidence of the execution of Wipro's refreshed strategy, and a successful turnaround from its struggles over the last decade before turning more constructive on the stock.

Global brokerage HSBC said that Wipro is undoubtedly impacted by demand slowdown and there are clear signs of market share loss.

"Wipro is stuck between an undemanding valuation and weak business traction," analysts at HSBC said while maintaining a 'Hold' rating on the stock, with a lower target price of ₹350 a share.

Nomura, too, has a 'Hold' call on Wipro, with a target price of ₹400. It said the IT services company's discretionary demand remains weak and the Q3 guidance showed that weakness is likely to persist. "Margin improvement is unlikely in FY24," it said, slashing Wipro's FY24-26 earnings per share (EPS) estimates by 3-6 %.

Goldman Sachs is bearish on Wipro, with a 'Sell' rating on the counter and a target of ₹380. According to the global brokerage, the IT firm's Q3 revenue guidance of -3.5 to -1.5% QoQ indicates a further slowdown in revenue growth.

Goldman Sachs expects a weak revenue growth outlook to result in further headwinds to near-term margins. The brokerage cut its FY24-26 EBIT/EPS estimates by up to 8%.

First Published:Oct 19, 2023 9:45 AM IST