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