Global brokerages bearish on Wipro after Q2 results, cut target despite better Q3 guidance

Global brokerage houses maintained bearish stance on Wipro, the country’s fourth-largest IT company by market cap, citing continued underperformance compared to peers even though third quarter guidance was better.

The stock rallied 3 percent intraday after the company reported better-than-expected operating performance in the quarter ended September 2019. It was quoting at Rs 248.90, up Rs 5.20, or 2.13 percent on the BSE at 1124 hours.

Jefferies has an underperform call on the stock and cut price target to Rs 218 from Rs 230 per share as it expects the company to continue underperforming on growth relative to top-tier peers.

“Underperformance will cap margin upside and drive gradual valuation de-rating. Growth continues to lag peers at 3.5-4.5 percent (YoY constant currency) over FY20-22,” said the brokerage which expects margin for FY20-22 at 17 percent.

Morgan Stanley also maintained an underweight rating on Wipro and slashed price target to Rs 230 from Rs 240, as organic revenue growth guidance of 0.5-2.5 percent for Q3 was softer than it expected.

“Company should sustain lower P/E multiple and we trimmed FY20-22 revenue estimates by 2-5 percent to reflect weak revenue growth,” the global brokerage said.

The IT company expects third quarter dollar revenue growth in the range of 0.8-2.8 percent compared to Q2.

Its profit grew by 7 percent sequentially to Rs 2,552.7 crore and IT services business increased by 2.1 percent quarter-on-quarter to Rs 14,656.1 crore in September quarter.

In dollar terms, IT services revenue grew 0.5 percent to $2,048.9 million QoQ while the same in constant currency grew 1.1 percent QoQ.

However, earnings before interest and tax (EBIT) fell 0.1 percent sequentially to Rs 2,650.7 crore and margin contracted 40 bps to 18.1 percent in quarter ended September 2019, impacted by wage revision.

Japanese brokerage firm Nomura has maintained its reduce call on the stock with a target price at Rs 235 per share as it expects growth to continue to lag peers.

“Outlook on BFSI/Retail segments is weak, and the improvement in healthcare and manufacturing seems some time away,” it said.

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