Recommendation from Software & IT Services Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

WIPRO : COMPUTING THE BEST DEALS

HERE IS WHY
✓ Strong order book with upward revenue curve
✓ Efficient use of capital and sustained growth
✓ Expertise in the domain of artificial intelligence

The IT and BPM sector has significantly contributed to India’s GDP with a contribution of up to 7 per cent in FY24. India is now preparing for the next phase of its IT revolution, with 76 crore citizens having access to the internet. The country has the fastest pace of digital adoption, achieved through government action, commercial innovation, investment, and new digital applications. This has a positive impact on citizens’ daily lives in terms of various activities and work forms. The Indian IT services sector is driven by infrastructure management, cloud-based software testing, and consulting services.

AI-related activities have seen a 2.7-fold increase in activities related to industry collaborations, product launches, and enterprise Generative AI strategies. Owing to this, our choice scrip recommendation for this issue is Wipro Limited, which is a global IT services company – the fourth-largest Indian player in the outsourcing industry. Its operations are divided into IT services, IT products, and ISRE (India state run enterprises). Its key IT service offerings, which contributed over 90 per cent to FY 2024 revenues, include digital strategy advisory, customer-centric design, technology consulting, custom application design, systems integration and package implementation, among others.

In Q3FY25, on a consolidated basis, the revenue of the company increased by 0.51 per cent YoY to ₹22,318.8 crore. On a sequential basis, its revenue increased by 0.08 per cent. The net profit stood at ₹3,366.2 crore compared to ₹2,701 crore, a YoY increase of 24.63 per cent, while sequentially it increased by 4.34 per cent from ₹3,226.3 crore. Despite macroeco-nomic headwinds, Wipro demonstrated resilience with a 9 per cent year-on-year order book growth and an 11 per cent year-on-year revenue increase, indicating improving demand.

The company’s strategic focus on large deals, exemplified by the USD 1 billion in closed deals across sectors like retail (AI-driven transformation) and airlines (cloud modernisation), provides a solid foundation for future revenue. This focus is further reinforced by growth in top accounts, demonstrating deepening client relationships. The company is capitalising on the growing demand for AI solutions. Substantial investments in AI tools, platforms and certifications for its workforce of 50,000 employees position the company as an early adopter and leader in areas like Agentic AI.

Company shareholder-friendly capital allocation strategy, including a higher pay-out ratio and increased dividends, reinforces investor confidence. Overall, the company trajectory points towards sustained growth driven by strategic investments, strong deal wins, and a focus on emerging technologies like AI. The company’s share is currently trading at PE ratio of 25.5 times lower than the industry average of 29.7 times, suggesting it might be undervalued.

The company has demonstrated strong financial performance, with a three-year compounded sales growth rate of 13 per cent, a return on equity (ROE) of 16.6 per cent, and a return on capital employed (ROCE) of 18.6 per cent. These metrics indicate efficient capital utilisation and strong profitability, indicating substantial returns for shareholders and effective capital deployment. Considering the aforementioned factors, we recommend BUY.