Wipro Limited is a leading global information technology, consulting and business process services company headquartered in India. Wipro uses cognitive computing, hyper-automation, robotics, cloud, analytics and emerging technologies to help clients adapt to the digital world. It has more than 1,400 clients spanning the BFSI, manufacturing, technology, energy and utilities, health and communication verticals. They have over 200,000 dedicated employees serving clients across six continents.
Investment Overview
WIPR owns a strong client base with a diversified portfolio mix. WIPR is a prominent player in the IT service sector, with a wide-ranging portfolio that spans 66 countries, serving over 1,400 clients. WIPR's portfolio is well-diversified, catering to a variety of industries, with the bank, financial services, and insurance (BFSI) sector accounting for 33%, followed by the consumer sector (19%) as of FY24 (March YE). WIPR, with a revenue of US$10.8bn in FY24, has secured 4th place among the largest IT service companies in India in terms of revenue. However, discretionary spending, especially in BFSI, has remained sluggish but WIPR is seeing recovery in its consulting business compared to technology (IT) consulting, which is an encouraging sign since WIPR has a higher consulting exposure. 2023 (calendar year) was a tough period for IT service providers due to inflationary environment, subdued spending and potential global recession.
Supply-side challenges continue to keep margins under pressure. EBIT margin has experienced a persistent decline since 1Q22 driven by a rise in labor-related expenses and the acquisition of low-margin business units, and an increase in the attrition rate. EBIT margin was down to 15.2% in FY24, from 20% recorded in FY21. The cost of salary, which makes up ~70% of operating expenses, saw a 2% y-o-y increase in FY24, following a significant 19% y-o-y increase in FY23. Additionally, the attrition rate rose from 11% in 2Q21 to 14.2% in 4Q24. EBIT margin is expected to remain under pressure with supply-side challenges such as increasing hiring programs for freshers, higher salaries, and attrition rate.
Global recession slows down clients’ IT spending; WIPR possesses greater risk due to higher consulting exposure. Potential global recession and rising inflationary pressures will have a negative impact on IT services’ spending as companies divert their focus to cost initiatives from growth initiatives. WIPR will see slower revenue growth compared to peer companies owing to its higher exposure to consulting services, which hold greater risk and impact on revenue growth. Furthermore, WIPR’s strong deal wins have yet to translate into meaningful revenue growth, which was notable in the 1Q25F revenue guidance of ‐1.5% to +0.5% q-o-q. Management attributes this to longer deal timelines for cloud & infrastructure projects along with delays in ramp‐ups of projects due to the uncertain macro‐economic environment.
SELL on WIPR with a lower TP of US$4.8 (previous US$5.6), on 12m forward P/E of 17x. Our TP for WIPR is based on 17.0x 12m forward earnings of US$1.46bn (prev US$1.48bn). The 17.0x 12m forward P/E is at a 25% discount to HCLT’s multiple of 22x, who is WIPR’s closest competitor. The lower TP is due to (i) decline in 12m forward peer PE from 20x to 17x and (ii) downward revision in consensus earnings by 3% for FY25F following 4Q24 earnings. The discount is attributable to (i) margin pressure (ii) higher exposure to consultancy services that may under-perform during an economic slowdown, and (iii) integration of new acquisitions into the business. According to consensus, WIPR is expected to have an earnings CAGR of 10% over FY25F-27F vs HCLT’s 12.7%. WIPR’s net margin is 13.3%/13.6% (vs HCLT’s 14.8%/15.0%) in FY25F/26F.
Risks
Short-term macroeconomic challenges hinder growth. With the recession looming the in near future, clients are focusing on reducing discretionary spending on IT services, which directly affects acquisitions of new clients and the expansion of existing projects.
WIPR’s acquisitions-led growth will keep margins under pressure. WIPR has been acquiring businesses that deliver lower margins, which ultimately keep group margins under pressure in the short term.
Topic
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