Wipro stock valuation at risk of poor performance

In its analyst meeting in November, Wipro’s management said that as far as acquiring and retaining cyber security talent is concerned, cyber security is its focus area. Of course, it helps that growth expectations from cybersecurity are high. Wipro has also acquired Australian cyber security company Empion to expand its presence in the Asia-Pacific market. Wipro’s biggest acquisition to date was in March when it acquired Capco, which is also focused on the cyber security business and has a presence in Europe and the US, for $1.5 billion.

While Wipro is talking about acquisitions and its intention to capture the growing cyber security market, this inorganic growth comes with the risk of poor execution. “We know that under the new CEO, the company is trying to restructure at various levels. They are moving from their core low-growth business to a high-growth business of cyber security. An analyst at a multinational brokerage house said “We see about a few more quarters for the recent acquisitions to start showing on the winning front of the deal,” he said requesting anonymity. We do not see any specific risk from the Edgil acquisition; However, since there have been many moving parts over the past year with multiple acquisitions and internal restructurings, we view execution as a risk to the stock,” he said.

To be sure, Wipro’s valuation is rich, given that the stock has appreciated 81% in 2021, beating the Nifty IT index, which has gained almost 57%. Based on Kotak Institutional Equities’ FY23 earnings estimates, Wipro shares trade at a price-to-earnings (PE) multiple of around 28 times. Larger counterparts Infosys Ltd. and Tata Consultancy Services Ltd. trade at 31 times each of the PE multiples of each.

Wipro’s stock has seen a re-rating over the past year, indicating that investors are capturing the positives of its management’s efforts to diversify from struggling verticals like healthcare. However, analysts are of the view that valuations of Wipro are costly, as potential acquisitions in future could lead to margin dilution. Additionally, the performance risk remains.