Growth worries for Wipro

The company needs to address pressures in order to catch up with its peers on revenue growth

Similar to the trend seen in the past few quarters, the December 2016 quarter (Q3) was a weak one for Wipro. The company lagged its peers TCS (Tata Consultancy Services) and HCL Technologies, which reported constant-currency revenue growth of two and three per cent sequentially, respectively. This metric grew by just 0.6 per cent for Wipro and was better than the 0.3 per cent fall seen by Infosys, but at the lower end of Wipro's forecast for the quarter. However, even this growth was aided by recent acquisition of Appirio, excluding which it would have been negative. The weak revenue growth can be attributed to the fact that most of its verticals (except energy) registered muted sequential revenue growth of 0.1 to 0.8 per cent in the quarter; this trend is unlikely to change soon. Revenues from the energy vertical grew fastest at 2.1 per cent and saved the day for Wipro. The trend was similar (weak) for all markets as well, with key ones growing between 1 and 1.7 per cent. Revenues from India and Middle East or West Asia (though smaller at 10 per cent of revenue) fell 4.2 per cent in Q3. What's more, the company has forecast sequential dollar revenue growth of one to two per cent for the ongoing quarter, which translates into 4.4 to 4.7 per cent growth for the full year. This means Wipro will continue to lag industry growth this financial year as well.

A closer look at client metrics reveals that Wipro's revenues from top five as well as top 10 clients have fallen sequentially for the past few quarters in a row, even as revenue from top client has been volatile. The company needs to address such pressures in order to catch up with its peers on revenue growth. The silver lining is 50-basis-point expansion of Ebit (earnings or profit before interest and tax) margin to 18.3 per cent on rising efficiencies. Most analysts were expecting this metric to contract 50-60 basis points. However, this is unlikely to provide much cheer to investors for multiple reasons. One, rising possibilities of higher cost pressures via increase in wages paid to US employees and/or US capping the number of H1-B visas issued could weigh on Wipro's margins. Though it has scope to improve utilisations, continued pricing pressure in the industry will also be a margin headwind. Second, improvement in revenue growth is a pre-requisite for sustained margin improvement. 

But, despite margin gains, net profit at Rs2,115 crore grew 2.2 per cent sequentially, the slowest compared to peers.

Overall, investor sentiment on Wipro stock will continue to remain subdued till the company arrests weakness in its revenues. Although Wipro has been active on the acquisitions front, this hasn't really helped much so far. Despite undemanding valuations of 13 times one-year forward estimated earnings, lack of visibility on growth could keep the stock in check.

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