Is Wipro the least preferred frontline IT stock?

Broad-based growth continues to elude the firm, sequential growth momentum fails to pick up over previous year

While straddling (capturing strong moves on either side) is a favourite strategy for playing Infosys results, one can probably trade the Wipro results simply by buying naked puts. Wipro has simply failed to impress with its performance.

 

Nomura calls Wipro the least preferred IT stock among Tier-1 companies, as its competitive positioning in developed markets is weaker than that of its peers. The stock opened sharply lower (nearly 8 per cent) reflecting investor perception on the results.

 

Inconsistency in numbers and lack of visibility are two reasons the company does not find favour with some analysts. Wipro has announced a series of deal wins over the past year, and its highest ever deal flow in the fourth quarter of previous fiscal. However, these deals are not being reflected in the growth numbers.

 

In its report on the company’s performance, Nomura mentions that broad-based growth continues to elude the company, with sequential growth momentum failing to pick up over the previous year. Wipro’s growth is sluggish both in geographies and in verticals. The 0.3 per cent constant currency growth reported by the company was possible because of a strong growth from Indian and West Asian businesses. The June quarter is seasonally a weak period for both these markets, as per an HSBC report.

 

 

The problem with Wipro lies with its weaker positioning in developed markets and strong, well-entrenched competition in growth segments such as BFSI/IMS/BPO. Wipro is clearly the laggard when compared with TCS and even Infosys. In its report, Nomura has pointed out that while Wipro has posted 0.8 per cent growth in the US market, Infosys delivered 3.7 per cent and TCS posted a growth rate of 5.5 per cent.

 

Hopes of a pick-up in Wipro’s operating margin were raised after the fourth quarter numbers. However, a sharp 170-basis-point drop in the EBIT margin caught analysts by surprise. Margins are now below the third quarter level of the previous fiscal. As per HSBC, margins during the quarter were impacted by currency headwinds, a one-month impact of the wage hike and a one-time rise in employee benefit costs (ESOPs and post-retirement costs). Nomura, however, expects residual impact of the wage hike to weigh on margins in the current quarter and expects it to correct further before rising.

 

Going forward, the company is expected to perform better in the second half as compared to the first. In the second quarter, the company is expecting 1.7-4 per cent growth. According to Nomura, if one excludes the growth that is likely from its latest acquisition of Canada based ATCO, organic growth from standalone Wipro will be 1.2-3.5 per cent.

 

On a valuation basis, Wipro trades at a 30 per cent discount to market leader TCS. Nomura feels this is justified, since Wipro gives lower growth comfort and is likely to have limited participation in the demand upturn than its peers.