Wipro not yet on the recovery path

Its Q2 performance, guidance and issues with problem verticals do not give confidence that it can match growth metrics of peers any time soon

After better-than-expected June quarter performance, IT firm Wipro’s second quarter show disappointed as did its weak guidance.

A 0.3 per cent sequential improvement in IT services revenues for a company that is looking at reversing its revenue growth performance compared to peers is not encouraging. While the performance is within the company’s own guidance of -0.2 to 1.5 per cent growth, Wipro ended up close to the lower end of that band.

The 4.4-6 per cent fall in the performance of the health care and communications verticals, which together account for 20 per cent of revenues, was one of the reasons for the sluggish top line show. While the company has indicated that the issues related to the two verticals are bottoming out and things should recover going ahead, analysts at Motilal Oswal Securities believe that Wipro’s revenue growth guidance (0-2 per cent constant currency on a sequential basis) indicates a different story.

Growth underperformance of Wipro is an outcome of persistent issues with its portfolio mix. Given the industry headwinds surrounding three verticals of communications, consumer and health care (37 per cent of total revenue) it is difficult to make a case for an immediate recovery in performance, they add.

Given the December quarter guidance, analysts believe the company will once again fail to match FY18 industry growth rates of about 5.3 per cent.

There are some bright spots in a performance, though nothing much to write home about. First, the Ebit (earnings before interest and tax) margins at 17.3 per cent were up 50 basis points sequentially as against estimates of flat performance.

This was led by reduction in net employee headcount for the quarter, which according to analysts is not sustainable. In the financial services, which is its biggest segment accounting for 26.7 per cent of revenues, Wipro is witnessing good traction for the second quarter in a row. It expects the momentum to continue on the back of deal wins and digital programmes. The other area which impresses is client mining, an area the company has not made much progress for a long time now. Wipro was able to grow revenues of its top 5 clients by 9.1 per cent year-on-year and the top 10 clients by 5 per cent on the back of integrated services offering, up-sell and cross-sell of services. Consolidated revenues were down 2.5 per cent year-on-year and 1.5 per cent sequentially at ~13,423 crore in September quarter.

Given the weak fundamentals and muted growth, analysts believe that valuations at 15 times FY19 estimates are out of sync and at a premium to Infosys and HCL Technologies, which are expected to deliver better numbers than Wipro.

The stock price, however, rose about 2 per cent to close at ~295 on Wednesday. What is supporting the stock is the ongoing buyback programme with of price of ~320 though the final dates for tendering of shares is yet to be announced.