Near-term pain for Wipro

But management sounds positive from the full-year perspective

Akin to its larger peer Infosys, Wipro disappointed the Street, too, with a muted guidance (-1 per cent to 0.9 per cent revenue growth) for the June quarter, as against analysts’ expectations of one to three per cent growth. This is a reflection of poor growth in the Indian market and slower decision making by some global clients. In Indian operations (about 10 per cent of revenues), a broad-based slowdown in the telecom vertical and delay in government deals are hurting growth. The management believes the telecom vertical will take a few quarters to improve and is banking on its order book in other verticals to support Indian operations after the June quarter.

Meanwhile, the March quarter saw a sequential dip in revenues from the BFSI (down one per cent) and telecom (down three per cent) verticals. Within BFSI, Wipro remains cautious on the investment banking business, which is witnessing a slowdown, but remains fairly optimistic on growth prospects in retail banking and insurance verticals. In the telecom vertical, while equipment growth continues to be challenging, smaller clients in the services segment are likely to provide some opportunities.

However, from the full-year perspective the management sounds positive. It reiterated the deal pipeline was robust and it was not unduly concerned about significant ramp downs, adding it had witnessed uptick in deal closure after March. Moreover, growth is expected to pick up after the June quarter. Among service lines, demand seems to be strong in application management and infrastructure businesses. The BPO business, struggling since the past three quarters due to abysmal deal wins, is also witnessing some traction and is expected to post some growth. Unlike TCS, which has seen pick-up in discretionary spends, Wipro continues to witness softness on this front, which needs to be monitored.

Another concern is falling revenues from top clients and reducing number of active clients, which fell by 10 to 943. And, though Wipro managed to keep the operating margin largely stable (down just 10 bps sequentially) in the March quarter, margins are likely to be under pressure in FY13 due to rising wage and higher investments.

Though Wipro’s endeavour is to grow above Nasscom estimates (11-14 per cent) in FY13, muted growth in the June quarter and margin pressure will prove to be an overhang for the stock in the near term. Analysts at Barclays Equity Research said, “We believe Wipro could continue to face further headwinds on execution, and hence, rate the stock ‘Underweight’.” The Wipro scrip fell 7.3 per cent to close at Rs 410.15 on Wednesday, as against a marginal decline in the Sensex. Most analysts are bearish on Wipro, with an average one-year target price of Rs 429.