Buyback offer the only silver lining for Wipro

Muted guidance for Q2, challenges in health care vertical and higher costs will keep margins subdued

The Wipro stock was up nearly 6.5 per cent reacting to the buyback offer and the fact that its June quarter numbers marginally beat expectations. The company delivered a sequential revenue growth of 0.3 per cent, which beat its own revenue guidance of 0 to -2 per cent. The growth in the revenues was led by strong performance in the financial services, energy and utility as well as the consumer segments. The management is optimistic about growth prospects in the financial services and energy verticals, which is expected to be pick up in the latter half of FY18. While the Street was enthused by the 3-4 per cent improvement in the two verticals and the outlook, the biggest trigger according to analysts for the stock in the near term is the big buyback offer.

The company announced it will buy back up to 343.75 million shares (7.06 per cent of equity base) at ~320 a share, aggregating to ~11,000 crore. The buyback, which is expected to be completed by November, is priced at a 12 per cent premium to the closing price on Friday. Analysts say given the 15 per cent reservation for small shareholders (holding less than ~2 lakh worth of shares) and the size of the tender offer, small shareholders could see a 100 per cent acceptance ratio and thus the gain. From the 52-week lows, the buyback price is 56 per cent higher. While some analysts say investors with a short- to medium-term period could use this buyback price as an opportunity to exit, others believe the downside is protected. Analysts at Edelweiss Securities say the positive commentary on financial services, energy and utility verticals, resolution of internal issues, high cash payout and valuation comfort imply limited downside from the current levels. However, there is no denying that the near-term challenges remain and the company, too, has guided for a muted September quarter. The company expects to hit a sequential revenue growth of -0.5 to 1.5 per cent while in the fourth quarter of FY18 it expects to match industry growth levels. Earnings before interest and tax (Ebit) margins for FY18 are, however, expected to come in at FY17 levels of 17.4 per cent. Ebit margins for IT services for the June quarter stood at 16.8 per cent which is at a multiyear low. Given the margins which are some of the lowest among Tier-1 players, inferior growth metrics and no nearterm tailwinds, analysts at HDFC Securities maintain a neutral rating on the stock.

While the share of the faster growing digital services to total revenues at 22.8 per cent is in line with other software majors, the Street will closely watch the company’s performance in the health care services and communication verticals, which are expected to be under pressure for at least two quarters.