Maintain ‘buy’ on Wipro with increased TP of Rs 550

Wipro delivered a strong set of Q3FY21 numbers, IT services revenue grew 3.4% QoQ (in cc) compared with our and Street’s estimates of 3.1% QoQ and 2.8% QoQ, respectively. However, the biggest surprise turned out to be the margins, which expanded 240 bps QoQ to 21.7% (highest in 22 quarters) via-a-vis Street’s median of 19.1%. For Q4FY21, management has guided for sequential growth of 1.5–3.5%.

The CEO mentioned that demand environment continues to be upbeat and that order book remains healthy with a mix of large and small deals. All in all, we are increasing the TP from INR467 to INR550 in the wake of stronger-than-expected top-line growth and margin expansion while rolling forward the valuation to Q1FY23E.

Growth trajectory improves; sector tailwinds in full force. After a disappointing last few years, Wipro finally seems to have gotten back on a growth path with most segments contributing to the spurt. Five of the seven strategic business units grew above 4% on a sequential basis (in cc) led by strong demand in digital transformation. Both Europe and Americas grew at a robust pace while Rest of World was slightly weak. Wipro closed 12 new deals in the quarter with a TCV greater than USD30mn, with the booked TCV of more than USD1.2bn. Significant improvement across parameters. The biggest surprise in Q3FY21 results is the tremendous improvement in margins. Management attributed it to the stronger revenue trajectory and improvement in several operational parameters.

Outlook and valuation: Solid execution; maintain ‘BUY’. The strategy execution by the new CEO is now beginning to bear fruit. The stock is trading at 20.7x FY22E. Maintain ‘BUY/SN’ while increasing the TP to INR550 (25xQ1FY23E) from INR467, recognising stronger-than-expected growth prospects and improved execution while rolling forward the valuation to Q1FY23E.