Repeal of Obamacare a worry for Wipro, Cognizant

Already struggling to push up growth, Wipro to face additional headwinds

As noise around repeal and replacement of Obamacare, the Affordable Care Act (ACA), gains steam, there will be a monumental pressure on two Indian IT giants - Wipro and Cognizant.

Wipro and Cognizant derive around 16 per cent and 29 per cent of their revenues, respectively, from the healthcare vertical as compared to 2.3 per cent to 12 per cent for its peers such as Tata Consultancy Services (TCS), Infosys and HCL Technologies. TCS and HCL Technologies club their revenues and hence the share of healthcare in their revenues would be even smaller.

“We have significant market share of the ACA business through our HPS acquisition, which is providing some short-term uncertainty and potential headwinds," said Abidali Z Neemuchwala, Wipro CEO, in January. He believes once there is more clarity on this front, client spending will come back. The CEO, however, expects business as usual for HPS' group insurance, medicare and other segments. The exact contribution of these to Wipro's healthcare business though is not available.

The Obamacare development has become an additional headwind for Wipro, which is already struggling to increase its growth rates. While rising protectionism in the US will impact the IT major, the company has also struggled to grow in line with industry in recent years. Though Wipro has been making strategic acquisitions and continues to invest in high growth potential areas, the same are yet to reflect on its financial performance. With continued pressure on top-line growth, margins too could follow suit.  

“Wipro's constant currency organic growth had been lopsided in favour of India/Middle East, Asia Pacific and Healthcare. Two of these three segments are now expected to be weak in the foreseeable future. Lest that is addressed, even the margins will be at risk," says Ashish Chopra, technology analyst at Motilal Oswal Securities. What's worse, business in India could also see some downside risks as the company is relooking its India government business.

Cognizant, on the other hand, has seen an increase in healthcare revenues of 1.2 per cent in December. So, any adverse news flow on account of Obamacare will create an impact on the company's performance. 

In an another development, Wipro's stock, which has lagged behind most of the large peers in last one-three years and is currently trading at undemanding valuations of 13 times FY18 estimated earnings, will continue to remain subdued till the company arrests weakness in its revenues. There is buzz that Wipro, similar to TCS, could announce a buyback soon and is likely to come out with a policy to return capital to its shareholders. If that happens, the stock price could witness a short-term rally. As the company struggles to grow, higher pay backs to shareholders would be a welcome move.