Wipro's weak margins, forecast disappoint

Could see earnings downgrades, which could keep the stock price in check

Like Tata Consultancy Services (TCS) and Infosys, Wipro, too, disappointed in the June quarter (Q1). Its constant currency dollar revenues at $1,932 million (up two per cent) was just in line with estimates, while profitability and forecast fell short of expectations.

This soft revenue growth is now visible for most technology companies, but Wipro has been struggling with its specific issues for some time. And this could put further pressure on the company amid uncertainty around IT (information technology) spending. This resonates in Wipro's flat IT services revenue growth forecast for the September quarter (Q2). The company expects to post dollar revenues of $1,931 million to $1,950 million in Q2, implying subdued sequential growth of 0.01 to 0.99 per cent.

Continued weakness in the energy segment (down three per cent sequentially in Q1) has hit results in the past few quarters, and the trend is unlikely to change meaningfully in a rush, believe analysts. Also, as a fourth of revenues come from Europe, it may witness near-term sluggishness in topline from this market. The company is restructuring its India and West Asia (Middle East) operations (10 per cent of IT services revenues) which could weigh on revenue growth.

"A somewhat delayed start to Wipro's transformational initiative under its new leadership will need some more time to translate into favourable results," says Sanjoy Sen of Aston Business School, UK.

In Q1, Wipro's revenues were partly driven by the two months’ integration of HPS acquisition. This aided performance of the finance vertical, which grew 2.9 per cent sequentially. But, integration expenses of the buy-out and wage hikes hit IT operating profit margin, which contracted 190 basis points sequentially to 17.8 per cent, lower than expectations. The company aims to perk up this metric by increased automation. But, given its weak revenue outlook, investors need to watch out for successful execution of this strategy.

Analysts could trim their full-year estimates for Wipro. The stock could see pressure in Wednesday's trade, as Q1 results came after market hours on Tuesday.

In a note before Wipro’s analyst call, Emkay’s analysts said, “September quarter revenue growth forecast means Wipro will struggle to get to double-digit revenue growth in FY17 (our current revenue growth estimates at 10.5 per cent here).” A sustained improvement in growth rates to match that of the sector is a pre-requisite for any re-rating of the Wipro stock.