Slow revenue growth, execution problems remain Wipro's Achilles heel

Analysts expect the 44% valuation discount to stay

The Wipro stock has underperfored its larger IT peers and the sector over the last year. 

Since its lows in November, Wipro has clawed back with gains of just 4 per cent, while the sector has bounced back by 18 per cent. While the large buyback has supported the stock, sluggish performance in recent quarters and a muted guidance have kept the lid on the upside. 

Manik Taneja and Devanshu Bansal of Emkay Global believe the relative underperformance will continue in FY20, as sectoral weakness could lead to moderation in growth in the financial services vertical (32 per cent of revenues). The firm did well in this vertical in FY19, reporting 16 per cent year-on-year growth in constant currency terms. 

Wipro had guided for 0-2 per cent sequential growth in the September quarter, factoring in the slowdown in financial services, delays in client decision-making, and the completion of large projects. 

The company’s growth in financial services was lower in the June 2019 quarter as compared to last year, given the challenges in the capital markets segment and European banking. In addition to the softer growth in larger segments of financial services and consumer, the sluggish performance in technology and health care in FY19 continued in the June 2019 quarter. 

Although Wipro’s digital growth has been healthy, pressure on the legacy part of the business has been the highest as compared to its peers. 

As a result, the share of digital services in overall revenues has more than doubled over the last three years to 37 per cent. While growth in this segment is at par or better than peers, the same isn’t reflected in the overall growth rate. This is because Wipro is losing market share in the legacy business and has not been able to arrest the decline much. 

Analysts believe the weak revenue growth guidance for the current quarter reflects execution problems that the company is faced with. 

CLSA expects the firm to remain at the bottom of the peer growth range in FY21.  

The brokerage believes that the 44 per cent one-year forward price-to-earnings discount that the stock is trading at, is warranted considering weak growth, margins, and persistent execution challenges.