AI Investments Will Offset Margin Pressures Despite European Risks

Key Takeaways

• Strategic focus on large accounts and consulting-led AI solutions positions Wipro for potential revenue and margin growth.
  
• Optimization of expenses and integration efforts are expected to yield synergy benefits, aiding in margin expansion.
  
• Dependence on BFSI and U.S. markets and client ramp-downs in Europe pose risks to Wipro's revenue stability and earnings growth amidst margin pressures.

Catalysts

Operates as an information technology (IT), consulting, and business process services company worldwide.

• Wipro is focusing on large account growth in priority markets and sectors, with significant sequential growth in its top accounts. This strategy could lead to increased revenue via expansion of footprint in major clients.
  
• The company has secured 19 large deals with a strong total contract value, driven by themes of cost reduction, vendor consolidation, and application modernization. These initiatives may lead to stronger future earnings and revenue as these deals are implemented.
  
• Wipro's strategic focus on AI and consulting-led solutions, backed by investment in talent development (training over 44,000 employees on advanced AI), positions it to capture emerging market opportunities, potentially improving net margins.
  
• Initiatives to optimize General & Administrative (G&A) expenses and integration of acquired entities are expected to yield synergy benefits, which could lead to margin expansion.
  
• Wipro's continued momentum in building a healthy pipeline of deals suggests potential revenue stabilization or growth in the near term, despite current challenges in specific regions and sectors.

Wipro Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Wipro's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.2% today to 14.3% in 3 years time.
• Analysts expect earnings to reach ₹152.6 billion (and earnings per share of ₹14.84) by about December 2027, up from ₹117.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹135.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.4x on those 2027 earnings, down from 27.5x today. This future PE is lower than the current PE for the US IT industry at 45.0x.
• Analysts expect the number of shares outstanding to decline by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.73%, as per the Simply Wall St company report.

Wipro Future Earnings Per Share Growth

Risks

• The guidance for the next quarter indicates a potential decline in revenue growth of up to 2%, partly due to seasonal factors like furloughs and fewer working days, but also due to client-specific issues in Europe, which could negatively impact revenue.
  
• Persistent declines in the Manufacturing and Energy & Utilities sectors suggest ongoing challenges in these areas, which may require significant strategic adjustments and could hinder overall revenue growth.
  
• Specific client ramp-downs in Europe and slower-than-expected deal conversions highlight potential execution issues, posing risks to both revenue and net margins.
  
• The impact of continued salary increases, as well as headwinds such as furloughs, risks narrowing margins despite operational improvements, which could pressure net earnings.
  
• The reliance on BFSI and U.S. market performance for growth highlights an over-dependence which may prove risky if these markets face disruptions or slowdowns, affecting both revenue stability and long-term earnings growth.

Valuation

• The analysts have a consensus price target of ₹269.02 for Wipro based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹350.0, and the most bearish reporting a price target of just ₹212.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹1064.4 billion, earnings will come to ₹152.6 billion, and it would be trading on a PE ratio of 27.4x, assuming you use a discount rate of 14.7%.
• Given the current share price of ₹309.0, the analyst's price target of ₹269.02 is 14.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.