Wipro's stock experienced a significant downturn, plummeting 9% following the release of its Q3 results. This decline was further exacerbated by a downgrade from Morgan Stanley, alongside concerns raised by other analysts regarding the company's margin risks.
For the third quarter, Wipro reported a revenue increase of 0.5% year-over-year, reaching 223.2 billion Indian rupees (US$2.6 billion). Sequentially, revenue was up 0.1%, which the company stated was above the upper end of their guidance. Large deal bookings also saw a rise of 6.0% year-over-year in constant currency, totaling $961 million. Despite these positive figures, the overall results appear to have fallen short of market expectations, triggering the negative stock reaction.
A key factor influencing the stock's performance was the downgrade by Morgan Stanley from "Equal-Weight" to "Underweight," with a reduced target price of ₹242 per share. The brokerage cited concerns about weaker revenue conversion and lower growth visibility compared to Wipro's competitors. Morgan Stanley analysts expressed apprehension that Wipro's Q4 guidance indicated a slowing conversion of order wins into revenue, casting doubt on the company's near-term execution. They also noted that growth visibility into FY27 seemed less robust than that of its peers, particularly as the market increasingly prioritizes consistent revenue momentum across the IT sector.
While Wipro's margin performance has been resilient, Morgan Stanley cautioned that this alone may not be sufficient to sustain valuations if top-line growth continues to lag. As a result, the brokerage anticipates that Wipro's price-to-earnings (P/E) discount relative to its peers may widen again, reversing some of the gains made over the past year.
Other analysts have also weighed in on Wipro's performance, expressing concerns about margin pressures. These concerns likely stem from a combination of factors, including increased labor costs, investments in new technologies like AI, and a competitive pricing environment.
Wipro's Q3 results revealed a mixed bag of performance metrics. While revenue saw a slight increase, net profit experienced a 7% year-on-year decline, settling at Rs 3,119 crore. However, the company noted that this quarter's profit was impacted by a one-time charge of Rs 300 crore related to India's new labor codes. Adjusting for this, net income stood at Rs 3,360 crore, reflecting a 3.6% quarter-on-quarter increase and a 0.3% year-on-year increase.
Despite the profit dip, Wipro's IT services operating margins expanded both sequentially and year-on-year to 17.6%, representing the company's best margin performance in recent years. The company also continues to integrate its acquisition of Harman's Digital Transformation Solutions (DTS) business unit, a move aimed at strengthening its capabilities in embedded engineering, AI, and product development.
Wipro's largest vertical, Banking and Financial Services (BFSI), witnessed improved demand, with segment revenue rising 1.6%. The IT services segment remained the primary driver of performance, demonstrating resilience despite macroeconomic challenges.
Looking ahead, Wipro faces the challenge of addressing concerns regarding its revenue growth and margin sustainability. The company's ability to convert deal wins into revenue, maintain competitive margins, and demonstrate stronger growth visibility will be crucial in regaining investor confidence. Wipro announced an interim dividend of ₹6 per share. The payment of the dividend will be made on or before February 15, 2025.
