Wipro surges 15% as Q1 operational performance beats Street estimate

The company's IT services EBIT margins came in at 19 per cent in Q1FY21, led by higher utilisation, cost efficiency and rupee depreciation

Shares of Wipro surged 15 per cent to Rs 258.80 on the BSE on Wednesday after the information technology (IT) services major reported a better-than-expected performance in June quarter of FY21 (Q1FY21), as its profitability improved despite contraction in revenues on a sequential basis.

The stock trades in the futures & option (F&O) segment, which has no circuit limits. Till 09:47 am, a combined 31.4 million equity shares had changed hands on the NSE and BSE.

The company’s IT services EBIT (earnings before interest and taxes) margins came at 19 per cent in Q1FY21, led by higher utilisation, cost efficiency and rupee depreciation. Analysts, on an average, had expected margins of around 16.6 per cent for the quarter. IT service dollar revenues in constant currency declined 7.5 per cent quarter on quarter (QoQ), in line with analyst estimates.

In Q1, Wipro’s profit before tax (PBT) grew 0.75 per cent at Rs 3,095 crore, compared to Rs 3,072 crore reported a year ago. In sequential terms, it grew 4.4 per cent. The IT major's net profit grew by 0.11 per cent year-on-year (YoY) at Rs 2,390.40 crore for the quarter ended June 30. It was 2.7 per cent higher over the previous quarter.

Consolidated revenue of the company increased 1.33 per cent YoY to Rs 14,913.10 crore in Q1FY21. On sequential basis, it dipped by 5 per cent.

“We expect Wipro to register an improvement in revenues in coming quarters led by improving deal pipeline, digital traction and healthy deal wins in consumer business unit and energy & utility vertical. Further, anticipated improvement in new client acquisition & client mining under the new CEO bodes well for the company,” ICICI Securities said in a note.

In addition, healthy margin trajectory & reasonable valuation keeps us positive on the stock from a long term perspective, it said.

“Over the past few years, Wipro has underperformed Tier-I companies on growth, partly due to higher exposure to verticals facing challenges (e.g. Healthcare and ENU). Additionally, changes at the company level (e.g. restructuring in India/the Middle East, etc.) have further constrained growth. However, we expect scope of recovery in some verticals such as Health BU,” Motilal Oswal Securities said.

Despite the COVID-19 impact, margin resilience/cash generation was impressive this quarter. Management's outlook of maintaining margins within a narrow band (v/s Jun'20) should result in strong EPS consensus upgrade. We believe Wipro is a good re-rating candidate due to upside of a turnaround under the new CEO, possibility of an impending buy back, and relatively attractive valuations (v/s TCS and Infosys, 13x 1-year forward P/E), it said.