BackWipro stock up 10%; massive rerating leads to valuation concerns
Some analysts are of the view that the company's past performance has been patchy so it is better to wait before ascribing higher valuation multiples
PremiumShares of IT services provider Wipro Ltd hit a new 52-week high of ₹472.75 on the National Stock Exchange on Friday following its March quarter earnings. On a sequential basis, the company's revenue growth and margins performance were largely in-line with the Street's estimates.
But investors in the stock are particularly enthused by the company's deal wins. In the March quarter, Wipro closed 12 large deals, resulting in a total contract value of $1.4 billion in Q4FY21. This compares with deal wins of around $1.2 billion in Q3FY21. The management said the demand environment is robust, and its overall pipeline is healthy. Further, the company has guided for 2-4% revenue growth in the June quarter, excluding acquisitions.
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However, some analysts are of the view that the company's past performance has been patchy so it is better to wait before ascribing higher valuation multiples. Analysts at domestic brokerage house ICICI Securities Ltd note that compared to its pre-covid long-term average, Wipro's valuations are about 70% higher and factor-in the potential turnaround convergence with peers. "Incrementally, given the higher likelihood of misses (vs surprises) and lofty valuations, we retain our sell rating," said the ICICI Securities Ltd report dated 16 April.
Concurring, analysts at Motilal Oswal Financial Services point out that in the past few years, Wipro has underperformed Tier I companies on growth due to its higher exposure to challenged verticals. So, they would stay on the sidelines and await the impact of its new strategy on organic growth. The domestic brokerage house has a neutral rating on the stock.
It should be noted that Wirpo’s revenue growth in constant currency terms was flat at 0.5% on a year-on-year basis. This compares with a year-on-year constant currency revenue growth of around 9.6% by Infosys in the March quarter. This clearly indicates that Wipro has a long way to go before catching up with peers.
To be sure, Wipro valuations are lower than peers, but the gap has narrowed. Taking into account the revised earnings per share estimates, the Wipro stock is now trading at a forward price-to-earnings multiple of 23 times. In comparison, Infosys trades at a valuation of 25 times forward earnings. As pointed out earlier, Wipro's revenue growth rates are still far behind the growth of its peers.
Meanwhile, analysts are wary of margin erosion on the back of the current restructuring and investments. They say, it could eat away gains from operational efficiencies, keeping margins range-bound.
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