Near-term growth trajectory to remain strong as Wipro banks on large deals

Despite cost pressures, margins expected to sustain on operating leverage

After a strong performance over the past few quarters, India’s third largest information technology major Wipro is eyeing at an accelerated revenue growth trajectory going ahead. The company posted a 6.9 per cent sequential dollar revenue growth as compared to Tier-1 average of 4.4 per cent in Q2.

Growth over the last few quarters were led by client mining, partnerships, acquisitions and focus on key markets and sectors. The company made its largest ever acquisition worth $1.45 billion when it bought UK-based financial services firm Capco in April this year.

Going ahead, the company expects growth to come from large deals and through expansion of market share in $200 million-plus and $300 million-plus accounts. Its top-10 customers contributed to 33 per cent growth YoY in the September quarter which was ahead of the company’s average.

Given Wipro’s focus on enhancing capabilities and expanding its services portfolio especially in the digital space, the street expects the company to sustain its growth momentum. Cloud-related services accounted for 30 per cent of its revenues in Q2 growing at an average of 6 per cent over the last four quarters. The cloud related pipeline is about a third of the company’s overall deal pipeline.

While growth is expected to be strong, the street will keep an eye on the margin trajectory. Despite salary revisions, integration of new acquisitions and higher investments, the company was able to limit the sequential decline of operating profit margins to 17.7 per cent in Q2. This was on the back of revenue growth and operating efficiencies.

While the company has guided for margins to be in the 17-17.5 per cent range, there could be cost headwinds from higher travel costs and reopening of facilities. However, Aniket Pande of Prabhudas Lilladher Research believes that the IT major can sustain margins on expectations of lower subcontracting costs, pyramid optimisation and higher operating leverage.

Though the stock has gained 23 per cent over the last six months, it has traded flat over the past three months and underperformed peers over the past months. Given strong growth expectations on the back of demand for transformation-related technologies as well as stable margins, investors with a 2-3 year horizon can consider the stock on dips.