Wipro Ltd shares plummeted more than 6% to a 52-week low of 383 rupees in early trade on Thursday after the IT services major reported a 9% drop in September quarter net profit to 2,659 crores, driven down by higher staff expenses and poorer non-US earnings.
“We reduced our EPS expectations for FY23/FY24 by 6%/2% to account for missed growth and increased risk. We remain neutral because we feel the current valuation is appropriate.” In a note, Motilal Oswal, a domestic brokerage and research firm claimed.
The firm maintained its Neutral rating on Wipro shares, with a target price of 380, as it waits for more evidence of Wipro’s improved plan execution and a successful return from its growth issues over the last decade before becoming more bullish about the IT giant.
“Wipro announced a dismal second-quarter earnings report. Revenue growth and margins were both modest, although in line with expectations. The revenue growth forecast for the third quarter was disappointing. With two months of pay raise impact remaining (in Q3), the company will be unable to create margins significantly above its declared target of 15% in H1 “, PhillipCapital said.
The Bengaluru-based company’s income from operations increased 14.6% to 22,539 crores, from 19,667 crores the previous year. Wipro expects its IT services segment to generate $2,811 million to $2,853 million in sales in the December quarter. This equates to 0.5% to 2% annual growth.
Wipro’s margins have fallen by over 600 basis points over the last eight quarters, mostly as a result of acquisitions such as Capco and Rizing, which have resulted in a large reset at gross margin levels.
These acquisitions have also consumed a large amount of cash, ruling out any buyback in the foreseeable future. All of this has resulted in no significant outperformance in terms of growth, with Wipro forecast to post below-industry growth in FY23.
The operating margin for IT services was 15.1% in the third quarter, up 16 basis points year on year. During the quarter, operating cash flows accounted for 180.6 percent of net income, amounting to Rs 4,800 crore ($590 million).
“We achieved margins of 15.1% in Q2 after absorbing the impact of salary raises and promotions,” said Jatin Dalal, Chief Financial Officer at Wipro. “Our profit growth was driven by higher pricing realizations and excellent operational improvements in automation-led productivity.”
Voluntary attrition was 23% in the previous twelve months, a 30 basis point reduction from the previous quarter.
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