Wipro results for the September quarter (2Q) were mixed and may be a near term dampener for the stock. Revenue was inline with consensus estimate (Bloomberg), and operating profit margin for IT services business (98 per cent of consolidated revenue) at 15.1 per cent was also close to expectations. EPS at the headline level was 6 per cent below consensus, but this was more due to non-operating items, and adjusted for that, the miss is only marginal.  

However, disappointment may stem from two factors. One is the lack of sequential improvement and positive surprise (versus consensus expectations) in 2Q operating margin, which is in contrast to TCS and HCL (other IT majors who have reported results so far). Wipro’s operating profit margin was flattish QoQ. Wipro’s operating margins are the lowest when compared with other three big players (TCS, Infosys and HCL Technologies).  The other factor is the guidance for 3Q sequential $ revenue growth of 0.5 to 2 per cent, which appears to be muted. At the time of taking this to print, Wipro ADR listed in NYSE was down by around 2.25 per cent.

Business momentum remains good

Similar to indications from peers, underlying business momentum remains good for Wipro, according to the management. Macro economic issues in US and Europe are yet to impact business for IT services. Constant currency growth in revenue at 12.9 per cent Y-o-Y and at 4.1 per cent Q-o-Q was decent. The growth was roughly similar with that reported by TCS and HCL Tech on a Q-o-Q basis. Strength was broad based across geographies and order book remains strong. Attrition remains high at 23 per cent, although it saw marginal improvement sequentially.

Investor takeaways

Wipro shares have had a rough ride on a YTD basis and the stock has been a big underperformer versus peers. Wipro is down by over 40 per cent versus Infosys, TCS and HCL Technologies , which are down 25, 19 and 28 per cent respectively on a YTD basis. Post correction, the stock now trades at one year forward PE of 17.5 times – 3 per cent discount versus 5 year average of 18.1 times. Given that the threat of global recession and its impact on IT services remain a risk (despite companies not seeing impact yet), on a fundamental basis, the stock does not yet offer adequate margin of safety for investors to get. At bl.portfolio we had given a book profit recommendation on the stock in our edition dated 23-May-2021 when the stock was trading at Rs 515 and believe it is not yet time to get in. Further corrections may take it into the value zone and investors are better of wating for those opportunities. Company’s relatively lower margins also make it unattractive for now on a relative basis.