Stock corner: Retain ‘hold’ on Wipro, target price of Rs 264

Wipro’s Q2FY20 revenue came largely in line —IT services’ revenue, at $2,049 mn, grew 0.5% quarter-on-quarter (Q-o-Q) [1.1% in constant currency (cc)]. The operating margin increased by 150 bps Q-o-Q to 17.7% versus Street’s estimate of 16.4% on account of higher profitability in IT products business, while IT services margin declined 30 bps Q-o-Q owing to wage hikes.

The management guided for a better Q3FY20 with estimated revenue growth of 0.8-2.8% in USD. Wipro’s 2.5% (Y-o-Y, cc) revenue growth continued to massively underperform peers Infosys and TCS — which reported close to double-digit Y-o-Y growth — a trend which is unlikely to change in the near term. This leads to a continued valuation discount for Wipro at 16x FY21E EPS (vis-à-vis TCS’ 22x and Infosys’ 20x). The unexciting growth metrics justify current valuation of 15.0x FY20E EPS. Maintain ‘hold’ with target price of Rs 264 as we roll over to Q4FY21E EPS.