On Thursday, Wipro (NYSE:WIT) Ltd. (WPRO:IN) (NYSE: WIT) stock, a global information technology, consulting, and business process services company, was downgraded from Hold to Sell by Investec, despite an increase in the price target to INR 530.00, up from INR 505.00. The revision reflects concerns over the company's near-term revenue growth prospects.
The downgrade was prompted by a reassessment of Wipro's revenue growth estimates for the fiscal years 2025 through 2027, which were reduced by 1.8%, 1.7%, and 1.6% respectively. This adjustment is based on the company's weaker than expected performance in the first quarter of FY25 and a revenue growth guidance for the second quarter that did not meet analysts' expectations. Despite these projections, Wipro is still expected to report a revenue decline in FY25.
However, the firm noted Wipro's better than anticipated EBIT (earnings before interest and taxes) percentage performance and continued strength in profit margins. This is attributed to the company's strategic moves, such as offshoring leadership roles and consolidating overseas offices, which have helped counterbalance the impact of wage increases.
Investec's valuation model, a reverse discounted cash flow (DCF), anticipates a compound annual growth rate (CAGR) of 7.6% in USD terms and 9% in INR terms from FY24 to FY35E. This is under the assumption that EBITDA percentage will be 110 basis points higher than the first quarter of FY25 from FY28 to FY35E, with a cost of equity at 10% and a terminal growth rate of 4%. It is important to note that Wipro's revenues have seen a 5.2% CAGR from FY13 to FY24 in USD terms, inclusive of acquisitions.
While there is a possibility of a share buyback that could provide some support to the stock price in the near term, the report suggests that the current stock valuation already reflects most of the positive aspects. Consequently, the risk-reward balance for Wipro shares is not viewed as favorable at this time.
In other recent news, Wipro Ltd. reported a slight 1% sequential decrease in IT services revenue for the first quarter of fiscal year 2025, amounting to $2.63 billion. However, the company also reported a 6% sequential growth in net income at INR 30 billion and a 10% year-on-year growth in earnings per share at INR 5.75.
Despite these figures, CLSA cut its price target for Wipro shares due to subdued revenue growth, while Jefferies raised its target amid revenue concerns. Citi maintained its Sell rating on Wipro's stock but increased the price target from INR455.00 to INR495.00, despite a weaker first quarter.
On the other hand, Nomura/Instinet upgraded its rating on Wipro from "Reduce" to "Buy," following the appointment of Srinivas Pallia as the new CEO. These are recent developments that highlight the varying perspectives of different analyst firms on Wipro's performance and outlook.
Despite the mixed reviews, Wipro remains focused on strengthening relationships with major clients and strategic partners, and continues to invest in AI-powered industry solutions and talent development.
InvestingPro Insights
To complement the analysis provided by Investec, InvestingPro data offers additional insights into Wipro's financial position and market performance. Despite the downgrade, Wipro maintains a strong market presence with a market capitalization of $33.02 billion. The company's P/E ratio of 24.89 suggests that investors are still willing to pay a premium for its earnings, although this is relatively high compared to its near-term earnings growth potential, as noted in one of the InvestingPro Tips.
Wipro's financial health appears robust, with InvestingPro Tips highlighting that the company holds more cash than debt on its balance sheet and its liquid assets exceed short-term obligations. This strong financial position could provide Wipro with the flexibility to navigate through periods of slower growth or to invest in future opportunities.
The company's dividend history is noteworthy, with InvestingPro data showing that Wipro has maintained dividend payments for 24 consecutive years. This consistency in shareholder returns may be attractive to income-focused investors, even though the current dividend yield stands at a modest 0.16%.
While Investec has concerns about Wipro's near-term revenue growth, it's worth noting that the company has delivered a strong return over the last five years, according to InvestingPro Tips. Additionally, analysts remain optimistic about Wipro's profitability, predicting that the company will be profitable this year.
For investors seeking a more comprehensive analysis, InvestingPro offers 10 additional tips for Wipro, providing a deeper understanding of the company's financial health and market position.
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