Wipro continues to lag peers

Pressure on energy, utilities and natural resource verticals might keep the stock under check

A stronger forecast for the March 2016 quarter vis-a-vis its own record in recent times did not excite the Wipro stock or Street sentiments around it. The stock, after opening lower than Friday’s closing price, gained 0.7 per cent at Rs 547.35.

The company expects its dollar revenues to grow two-four per cent sequentially (between $1.87 billion and $1.91 billion) in the ongoing quarter, its highest guidance in recent quarters. Healthy momentum in large deal wins (six this quarter) led by infrastructure management services business is a key driving force behind the forecast.

“We delivered revenues in line with our guidance. We saw a pick-up in large deal closures led by global infrastructure services. It is becoming increasingly clear that customers want to simplify operations and optimise their information technology spend, while investing in digital to transform their business. We are well-positioned to take advantage of this trend,” said T K Kurien chief executive.

The Street bearishness is due to the fact that Wipro has missed sector growth rates for many quarters now. Additionally, its margins remain lower compared to peers Infosys and Tata Consultancy Services. With expectations of continued pressure on the energy, natural resources and utilities verticals (14 per cent of top line) in the coming quarter, analysts are in a wait-and-watch mode.

“Even if Wipro meets its Q4 guidance, the stock could see only a marginal uptick. After four years of single-digit growth in dollar revenue, consistent delivery is a pre-requisite for any meaningful upsides in the stock,” says Harit Shah, IT analyst at HDFC Securities.

He adds disruptive changes, continuing issues in energy and inferior growth metrics leads him to remain ‘neutral’ on Wipro. He has a revised target price of Rs 563 (Rs 581 earlier), implying a price-to-earnings ratio of 13x one-year forward rolling earnings per share.

While Infosys, its closest listed peer, raised the full-year revenue growth guidance and sounded positive on the road ahead, Wipro management remained cautious indicating the overall IT budgets could be flat to negative going forward. The TCS management, too, continued to be optimistic about its future growth, although analysts believe its revenue growth could see pressure. If Infosys achieves its revised guidance, it could post industry leading growth in FY16. Most analysts have Infosys as their top pick in the sector, and remain positive on TCS as well.

Wipro posted an inline set of numbers for the December 2015 quarter. Its dollar revenues grew 0.3 per cent sequentially and 3.6 per cent year-on-year (y-o-y) to $1,838 million and was mid-way of its guidance for the quarter. Its constant currency revenues grew 1.4 per cent sequentially – a tad lower than Infosys’ but visibly lower than its own growth of 3.7 per cent in the year-ago quarter. Notably, this metric has been in a wide range of 0.2 per cent to 3.7 per cent for Wipro, indicating lower predictability.

In rupee terms, its consolidated revenues grew 2.8 per cent sequentially and 7.2 per cent y-o-y to Rs 12,861 crore and was slightly ahead of Bloomberg consensus estimate of Rs 12,822 crore. The net profit, however, fell 0.3 per cent sequentially even as it was up 1.9 per cent y-o-y to Rs 2,234 crore. The sequential weakness was on account of a 148 basis point fall in operating margin to 20 per cent due to provisions in its products segment. The IT services operating margin, too, contracted 50 basis points to 20.2 per cent on a sequential basis. Lower utilisations, thanks to the Chennai floods as well as spends towards backup plans in the flood, were the key factors weighing on the margins and eclipsed the benefits from a weaker rupee.

“Wipro has much to do on client mining given its relatively low annuity revenue, but initiatives around key account management, sales incentives and delivery managers pitching in for business are a start. Focus will shift to execution under new CEO,” writes Abhiram Eleswarapu, IT analyst at BNP Paribas in a post-results report. He has a ‘buy’ rating on Wipro due to inexpensive valuations.

Abid Ali Neemuchwala, who will take charge as chief executive officer of Wipro on February 1, 2016, said: “We are focused on driving market share growth in our core businesses through integrated domain and technology services, while investing for the future in building differentiated Digital capabilities.”

Among key metrics, retail and healthcare verticals led revenue growth in constant currency terms, while telecom grew 2.7 per cent and energy was flat. Unlike TCS which witnessed softness in India revenues, Wipro and Infosys witnessed a healthy growth in this market. India and West Asia along with Asia-Pacific and other emerging markets were the fastest growing this quarter for Wipro. Americas, which forms half its revenues, remained flattish, up 0.3 per cent. Like its peers, Wipro too witnessed improvement in attrition in the quarter. During the quarter, Wipro added 39 customers and acquired two firms - Cellent AG, a European IT consulting and services firm, and Viteos Group, a platform back-office service provider in the alternative investment management sector.