Edelweiss rates Wipro stock as Hold, revises Target price at Rs 280

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Published: October 24, 2017 6:17:35 AM

In the past 1 year, the stock has given 22% returns and is currently trading at 14.5x FY19E EPS.

Wipro stocks, edelweiss on Wipro stock, Wipro stock market, Wipro business, Wipro revenue, Wipro profit, Wipro loss, IT services companies With revenue/EPS CAGR estimated at 6.8%/6.9% over FY17-19, the stock trades expensive. (Image: Reuters)

Wipro’s Q2FY18 performance was better than Street’s estimates with IT services revenue at $2,014 million and EBIT margin at 16.8%. Key highlights: (1) Revenue grew 0.3% q-o-q CC; (2) Muted revenue growth guidance of 0-2% for Q3FY18; (3) Positive commentary on BFSI and consumer verticals; (4) From Q4FY18 management expects industry-level growth; and (5) FY18E margins to remain at FY17 levels. We believe that with key verticals facing challenges, FY19E revenue growth will at best be at industry levels. In the past 1 year, the stock has given 22% returns and is currently trading at 14.5x FY19E EPS. With revenue/EPS CAGR estimated at 6.8%/6.9% over FY17-19, the stock trades expensive. Hence, we downgrade to ‘Hold’ with a revised TP of Rs 280.

Wipro reported 0.3% q-o-q (CC) revenue growth with financial services, manufacturing and consumer business leading the pack – up 3.3%, 1.9%, and 1.7% q-o-q (CC), respectively. However, healthcare, communications and energy/natural resources & utilities (E&U) were laggards – down 5.9%, 4.4% and 1.3% q-o-q (CC), respectively.

Geography-wise, growth was driven by APAC & other emerging markets and Europe. While weakness in the America’s was due to regulatory uncertainties in healthcare, India & the Middle East declined (3.4% q-o-q CC) due to restructuring of India business and holidays in the Middle East.
The company has guided for weak Q3FY18 with revenue growth of 0-2%. However, management expects revenue growth to recoup to industry levels from Q4FY18. Wipro highlighted it is gaining traction in digital technologies with 7.9% q-o-q growth and its automation platform would garner revenue from higher outcome based projects.

While management is optimistic on growth revival, estimated EPS CAGR of 6.9% refrains us from raising our target 14x multiple. Besides, our target earnings multiples for IT services companies ranges between 13-16x. The stock has already rallied 22% in past 1 year and currently trades at 14.5x FY19E EPS.

We downgrade to ‘Hold/SP’ from ‘Buy/SP’ with a revised TP of `280 as we cut FY18/19E earnings by 1.3/3.4% on weak Q3FY18 guidance, and revision of FY18E $ rate to Rs 65 from Rs 66.

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