Wipro Q1 preview: Covid-19 to dent numbers; strategy under the new CEO key

Wipro, the Bengaluru-headquartered information technology (IT) services company, will announce its financial results for the quarter ended June 2020 (Q1FY21) on Tuesday, July 14. It will be the second large-cap IT company to release its earnings after Tata Consultancy Services (TCS). That apart, it will be the first quarterly result announcement by the company under its new CEO, Thierry Delaporte, who took charge of the firm earlier this month.  

Wipro, like its peers, is expected to post a weak set of numbers for the quarter under review given the economic dislocations caused by the nationwide lockdown from March 23 in order to arrest the spread of Covid-19 pandemic. Most analysts expect Wipro to wait for one more quarter for providing quarterly guidance. The company's strategy under the new CEO, updates on client interactions, assessment of the impact on IT spend due to Covid-19 pandemic across verticals, and commentary on earnings before interest and tax (EBIT) margin will be key things to watch out for, say analysts.

At the bourses, shares of Wipro gained11.7 per cent during the April-June period as against a 16 per cent rise in the S&P BSE Information Technology index. The S&P BSE Sensex has rallied over 18 per cent during the period, exchange data show. 

Here's a look at what leading brokerages expect from Wipro's June quarter nos -

UBS

It expects US dollar IT services revenue to decline by 8.6 per cent quarter-on-quarter (QoQ) and 7 per cent year-on-year (YoY). Constant currency revenues are likely to decline by 8.2 per cent QoQ and 5.7 per cent YoY. Consolidated EBIT margins expected to drop 99bps QoQ to 15.6 per cent. The markets are still in a mood to overlook any misses given the continued macro uncertainty and even the lack of negatives could trigger positive share price reactions. "Q1 should be the low point for revenues and we expect a gradual recovery from Q2 FY21 onwards," it said. 

Edelweiss Securities

The brokerage expects revenues in US dollar terms to decline 5.9 per cent QoQ and 4.3 per cent YoY at $1,950 million. In rupee terms, revenue is seen at Rs 14,896.9 crore, down 5.2 per cent QoQ and 1.2 per cent YoY. Earnings before interest, tax, depreciation, and amortisation (EBITDA) is estimated to fall 10 per cent YoY at Rs 2,772.8 crore. On YoY basis, the numbers are expected to decline 3.6 per cent. EBITDA margin is seen at 18.6 per cent against 19.6 per cent logged in the previous quarter as well as in the year-ago period. Net profit or profot after tax (PAT) is pegged at Rs 2,133.2 crore, down 8.3 per cent QoQ and 10.6 per cent YoY. It expects revenue to decline 5.7 per cent in constant currency (cc) terms and estimate 20 basis points (bps) cross-currency headwinds.

IDBI Capital

Analysts at the brokerage forecast Wipro's IT services revenue to decline by 8 per cent QoQ in constant currency (CC) terms and factors in a cross-currency tailwind of nearly 45bps. Overall revenues in US dollar terms are seen at US$1,958 million, down 8.6 per cent QoQ and 6.9 per cent YoY. In rupee terms, revenue is expected to fall 5.9 per cent QoQ but rise 0.4 per cent YoY at Rs 14,781.5 crore. It estimates EBIT margin to decline by 65bps QoQ to 15.3 per cent "impacted by revenue decline partly offset by rupee depreciation, lower travel cost and cost optimisation." On YoY basis, the numbers are seen falling by 91 bps. Net profit is seen at Rs 2,140.6 crore, down 8 per cent QoQ and 10.3 per cent YoY.

Key monitorables include the timeline for Thierry Delaporte's strategy for reviving Wipro's growth,  Update on client interactions and assessment of the impact on IT spend due to Covid-19 across verticals - especially BFSI, Consumer business unit and Energy, natural resources, utilities & construction (ENU), commentary on EBIT margin; and outlook on capital allocation.

Kotak Institutional Equities

The brokerage forecasts a sequential revenue decline of 7.6 per cent in constant currency and cross-currency headwind of 50 bps. Revenue decline will be broad-based and particularly high in the consumer vertical. Revenue decline will be on the account of demand and supply-side factors.  It expects total revenues to fall 7.1 per cent QoQ and 1 per cent YoY to Rs 14,719.6 crore. It expects sharp revenue contraction of 10 per cent QoQ in the BPO service offering. "Note that approvals to transition to Work from Home (WFH) took longer in BPO services compared to IT services," it said in a preview note.  Adjusted net profit is expected to fall 5.1 per cent QoQ and 7.5 per cent YoY at Rs 2,208.4 crore.

Order pipeline and indication on return to normalcy on the pace of decision making, the magnitude of pricing pressure,  levers to defend operating margin, the magnitude of cut in variable compensation, path to achieving industry matching performance, and changes to one could expect under the new CEO will be some of the key interest areas for investors, the brokerage says.