Wipro to gain from buyback plan, but re-rating is unlikely anytime soon

Volatile and inconsistent growth of key business verticals likely to impact top line growth

Though the buyback announcement would support Wipro’s stock in the short term, cashing in on the demand opportunities will be a key trigger. Wipro’s sequential revenue growth in the March 2019 quarter (Q4) in constant currency terms fell to 1 per cent, from around 2-3 per cent in the last two quarters. The Q4 growth is also lower than the Street’s expectations of 2 per cent, as well as Infosys’ and Tata Consultancy Services’ (TCS) numbers.

According to Sanjeev Hota, head of research at Sharekhan, Wipro is unlikely to be re-rated unless it regains revenue growth momentum. 

This looks difficult, considering the weakness in some of its key business verticals and geographies. The same was reflected in Wipro’s tepid revenue growth guidance of up to 0.6 per cent for the June 2019 quarter.

Though key verticals such as banking, financial services and insurance (BFSI) and health care grew 1-2 per cent sequentially in Q4 in constant currency terms, analysts are not extrapolating the same given the volatility and inconsistency of Wipro’s key verticals.

In fact, Wipro’s 60-per-cent incremental revenue growth in Q4 was contributed by consumer business, which grew 5.3 per cent sequentially in constant currency terms. The company also indicated that there was some slowdown in health care and macro concerns in the BFSI segment. 

These two sectors had 44 per cent revenue contribution for Wipro in 2018-19 (FY19). Further, growth in Europe, which declined by 3 per cent in Q4, and details of its recently detected cybersecurity issues need to be keenly monitored.

There is some concern about the aggressive cost rationalisation, especially at a time when companies will have to invest in beefing up their digital capabilities and people to participate in the growth opportunities. 

For instance, though the revenue share of Wipro’s digital business improved from 33 per cent in December 2018 quarter to 35 per cent in Q4, it grew by 6.4 per cent sequentially, lower than its peers.

However, the management expects 2019-20 revenue growth to be better than FY19. This would keep margins under check. During the June 2019 quarter, operating margin is also likely to be under pressure due to wage hikes.