Out of all the tier-1 IT companies, Wipro is the least preferred due to its dismal outlook and challenges

 Out of all the tier-1 IT companies, Wipro is the least preferred due to its dismal outlook and challenges

Analysts predict that worries about economic headwinds won't go away anytime soon, limiting any significant gains for Indian IT businesses.

Due to its continued weakness and impending difficulties after the unsatisfactory July–September quarter report cards of leading Indian IT businesses, Wipro continues to be the most despised IT stock.

Analysts predict that Wipro will have some of the lowest topline growth among its peers in FY24 due to the company's declining sales and profit in the quarter that ended in September and its lackluster growth outlook for Q3.

Due to obstacles including postponed decision-making procedures, planned pay increases, the increased effect of furloughs, and a protracted revenue conversion period, Wipro's future prospects are unclear. The next quarters may see a slow recovery.

According to a research by Sharekhan, worries about macro headwinds are unlikely to go away anytime soon, which would limit any significant outperformance for Indian IT businesses.

In 2023, Wipro shares (about Rs 384) have decreased by more over 2 percent, lagging the Nifty benchmark. Out of 45 brokerages, up to 18 have issued "sell" calls on the company, 15 have issued "hold" recommendations, and 12 have issued "buy" ratings. Infosys, in contrast, had eight "sell" recommendations and twenty-one "buy" calls.

Q2 Results raise more issues

Wipro's revenue decreased for the third quarter in a row as a result of a general downturn in important sectors including manufacturing, BFSI, and communication. There was a little improvement in its EBIT margin and deal win total contract value. Still, Motilal Oswal predicts that the downturn will persist in Q3.

"Given Wipro's broader presence within discretion areas, conversion is a challenge as organizations are cautious and are reprioritising that spending," the brokerage said.

The brokerage said that it had a "neutral" call on the stock with a target price of Rs 418 and predicted that Wipro's operating margins would decline in the next quarter as a result of a pay raise, followed by a significant rebound in Q4.

Before becoming more positive on the stock, analysts are awaiting more proof that the IT company's revised strategy is being implemented and that it has successfully recovered from the setbacks it suffered over the previous ten years.

Underperformance will persist

Due in large part to its poor relationship between contract wins and top-line growth, Nuvama Institutional Equities predicts that Wipro will continue to lag behind competitors Infosys, Tech Mahindra, and Tata Consulting Services.

Retaining a "hold" recommendation, the brokerage stated that the stock's cheap valuation and strong dividend yield should limit downside risk in the medium term. The target price of Rs 390 was set.

The Bengaluru-based IT company's Q3 sales projection of -3.5 percent to -1.5 percent QoQ, according to Goldman Sachs, points to a further decline.

"We anticipate weak revenue growth prospects to lead to additional challenges to near-term margins," the statement said, accompanied by a potential 8% reduction in FY24–26 EBIT/EPS projections. Wipro is a "sell" recommendation from Goldman Sachs, with a target price of Rs 380.

Not the worst

Wipro will have difficulties in the short future, according to Religare Broking, but analysts anticipate that things would get better in the medium- to long-term.

It maintained a "hold" recommendation on the company with a target price of Rs 432 and said, "The worst is yet not over as administration has guided muted growth expectations for Q3 FY24... we believe that for next 1-2 quarters accounting records are expected to remain muted because of prevailing uncertainty." "We would be granted more confidence once deals start getting transitioned to revenue and margin stabilises."

The recent poor performance of Wipro has had a substantial effect on market expectations. Analysts claim that market confidence has been further damaged by the company's prediction of a sequential decrease in Q3 constant currency IT revenue, particularly in the BFSI sector.

"Wipro is in a difficult situation due to revenue leakage, senior management turnover, continuous growth behind peers' performance, and absence of blockbuster acquisitions. We have lowered our forecasts for sales and earnings per share (EPS) for FY2024–2026 by 3–5% and 6-7%, respectively. 16 times FY25E valuations are cheap but reasonable given the lackluster growth prospects, according to Kotak Securities.