AI Investments Will Transform Client Offerings In BFSI And EMR Sectors

Key Takeaways

• Investment in AI and transformative tech is expected to drive growth, improving revenue streams and enhancing client offerings.
  
• Strong deal pipeline in BFSI and EMR sectors supports positive top-line revenue growth.
  
• Macroeconomic challenges and sector degrowth could hinder revenue growth, with client concentration posing risks to revenue stability and margins.

Catalysts

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

• Wipro's increased investment in AI and transformative technologies is expected to drive future growth by enhancing revenue streams and client offerings. The focus on AI-led innovations across various sectors could lead to higher revenue from new and existing clients.
  
• The company's strong large deal pipeline in BFSI and EMR (Energy, Manufacturing, Resources) is projected to support growth. This focus on significant deals could contribute positively to top-line revenue growth.
  
• Efforts to expand operating margins to a 12-quarter high are significant. An ongoing focus on cost optimization and improved execution could enhance net margins, benefiting overall profitability.
  
• The commitment to AI skilling with 50,000 employees trained may improve efficiencies and productivity, potentially expanding earnings through reduced internal costs and enhanced service deliveries.
  
• Increased capital allocation to shareholder returns, with dividends now at 70% of net income, signals potential for higher EPS and shareholder value, supporting investor perception and stock valuation.

Wipro Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Wipro's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.0% today to 15.4% in 3 years time.
• Analysts expect earnings to reach ₹165.6 billion (and earnings per share of ₹15.81) by about January 2028, up from ₹124.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.0x on those 2028 earnings, up from 26.3x today. This future PE is lower than the current PE for the US IT industry at 32.8x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.75%, as per the Simply Wall St company report.

Wipro Future Earnings Per Share Growth

Risks

• The mentioned macroeconomic challenges and uncertainties, particularly seen in the soft performance in Europe and APMEA, could negatively impact revenue growth prospects in these regions.
  
• The degrowth in key industry sectors such as technology, communications, and certain parts of EMR (Energy, Manufacturing, and Resources) can constrain the overall revenue growth trajectory.
  
• The guidance for sequential revenue growth is uncertain, with a range of -1% to +1%, indicating potential flat or negative revenue growth in the near term, which may affect overall earnings.
  
• Despite significant deal wins, the lumpiness and seasonal nature of large deals could result in inconsistent revenue realization and pose a risk to achieving steady growth in net margins.
  
• The reliance on top 10 clients for growth, contrasted with a decline in other client revenues, could indicate concentration risk, potentially impacting revenue stability and net margins if any key clients reduce their spending.

Valuation

• The analysts have a consensus price target of ₹292.92 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 ₹360.0, and the most bearish reporting a price target of just ₹220.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹1074.2 billion, earnings will come to ₹165.6 billion, and it would be trading on a PE ratio of 28.0x, assuming you use a discount rate of 14.8%.
• Given the current share price of ₹312.3, the analyst's price target of ₹292.92 is 6.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.