Wipro Rating ‘Add’; A good performance in second quarter

Wipro reported a good, yet in-line quarter. Revenue growth guidance for the December 2020 quarter surprised us positively to the extent of 1.5%. The new CEO outlined a set of priorities that seemed reasonable. Executing on these priorities will entail a set of changes that will be known over the coming months. After a strong and partly buyback-fuelled rally in the stock price, upsides will be modest. We bake in strong demand and lower-than-expected pricing pressure and raise FY2021-23e EPS by 6-11% and FV to Rs 380 (17X December 2022e earnings).

Steady quarterly performance; BPO registers robust growth
Revenue growth of 2% q-o-q in c/c (~1.7% organic) and decline of 3.4% y-o-y was in line with our estimate. Revenue growth was led by BPO that grew 8.1% q-o-q. All verticals grew at healthy clip except energy & utilities and technology. The retail vertical bounced back smartly and grew 4.5% q-o-q in c/c. Ebit margin increase of 20 bps was consistent with our estimate and aided by lower bad debt provision and operational improvements, offset by currency headwind of 60 bps. Net profit of Rs 24.7 bn missed our estimate due to lower other income.

Strong 1.5-3.5% sequential growth guidance for December 2020 quarter
The guidance was far better than our estimated 0-2% growth and powered by—(i) full quarter benefit of large deals that started ramp-up in the September 2020 quarter. These include EON, John Lewis and Marelli deals; and (ii) 0.5% contribution from acquisitions. The management indicated that growth will be broad-based in the December 2020 quarter.

New CEO outlines strategic priorities
The CEO outlined new strategic direction of Wipro that includes absolute growth focus, prioritise investments in areas of competence and scale, have offerings that address a wider spectrum of decision makers, augment talent pool and simplification of operating model. Executing these priorities will require changes in people, process, go-to-market and organisation structure. More details will be available on these changes later.

Sharp rise in stock price, partly fuelled by buyback expectations
We incorporate strong December quarter guidance, general demand strength in business and lower-than-expected pricing pressure in our estimates. These result in 6-11% increase in our FY2021-23e EPS. Our growth estimates stand at moderate 7.7% and 6.2% for FY2022e and FY2023e in c/c. We are not baking in meaningful turnaround-driven benefit in our estimates. We value Wipro at 17X December 2022e earnings resulting in a FV of Rs 380/share. At our target multiple, the stock trades at ~33% discount to sector leaders. After a strong rally in the stock price, upsides will be muted from here.