Tough road ahead for Wipro as growth challenges likely to continue

In a weak market, the Wiprostock gained over 3.6 per cent after the company said that it will stick to the buyback plan announced earlier. The stock had shed over 8 per cent since the Union Budget (July 5) on worries that the company may not go ahead with the Rs 10,500-crore buyback plan, given the 20 per cent tax on buybacks.

Though the stock has gained somewhat, brokerages believe the road ahead — at least in the near term — is likely to be tough. The company’s largest vertical, the banking, financial services and insurance (BFSI), which accounts for 32 per cent of revenues, registered degrowth or fall of minus 0.6 per cent on a constant currency basis, compared to the March quarter.

The vertical has been its growth driver, posting an average growth of over 2 per cent over the last four quarters. Overall revenue growth, which fell 0.7 per cent, came in at the lower end of the guided range of minus 1-1 per cent.

The company indicated there were issues with European banking and financial services (banks and capital markets), manufacturing, and US health care. The company has had to cope with deferral of deals, slow decision-making, muted execution, and sharing of productivity benefits with clients. What weighed on growth in the quarter was the consumer vertical, which was down 4.4 per cent; manufacturing and health care were down 1.5-2 per cent each on a constant currency basis.

Like its peers, the digital segment, which accounts for over 37 per cent of revenues, grew at a strong 5.3 per cent over the June quarter. However, the same has not helped to improve overall growth rates, given there is pressure on the legacy business (minus 5.7 per cent), which is higher than the flattish trend for peers such as Tata Consultancy Services and Infosys.

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In addition to the results, muted growth guidance has disappointed brokerages. For the September quarter, the company expects to grow at 0-2 per cent on a constant currency basis. Analysts at HDFC Securities believe that the guidance is below expectation, as it factors in the slowdown in the BFSI space, delays in client decision-making, and completion of some large engagements. “We sense growth challenges for Wiprowill persist, led by client-specific issues, weakness in consumer, manufacturing, HealthPlan Services, and continued legacy drag,” add analysts.

The positive aspect from the June quarter has been on the margin front. Profit margin before interest and taxes at over 18 per cent increased by 50 basis points over the year-ago quarter and came ahead of expectation. This came despite multiple pressures — be it on account of salary hikes, increase in the US workforce, lower utilisation, and poorer mix. The yields were led by major gains on foreign exchange and other operating income as well as automation benefits in fixed price contracts.

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Analysts at CLSA however, say the company is likely to run out of operating levers if growth does not pick up in double digits in a tight labour market. The headwinds on the margin front will largely come from wage hikes, tight labour market, localisation costs, and peak utilisation levels.

Given that its growth rates have been the lowest among tier-1 information technology companies for over five years now and outperformance on this front seems unlikely, investors should avoid the stock.

Source: Business-standard.com

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