Wipro: IT has a long way to go

Wipro’s muted show over the past year has kept investors on the edge. In 2015-16, the company recorded a revenue growth of 7.6 per cent in constant currency, while its peers, Infosys and TCS, reported 13.3 per cent and 11.9 per cent growth, respectively.

The recent June 2016 quarter results too were hardly encouraging for the country’s third-largest IT player.

The company saw sequential revenue growth of 2 per cent in constant currency terms, despite taking into account revenues from its recent acquisition of HealthPlan Services.

Given the challenges that the IT sector currently faces, company-specific issues can drag Wipro’s performance further over the next year.

Wipro’s higher exposure to discretionary spends of clients in the energy space, sharp rise in attrition, drop in revenues from top clients and the ongoing restructuring of the India and West Asia business, can impact growth.

At the current market price of ₹480, the stock discounts its estimated earnings for 2016-17 by 13.5 times — this is at the lower end of its trading band over the last three years. However, despite cheap valuations, investors can stay clear of investing in the stock.

Those who already hold the stock can consider exiting, given its weak prospects.

Until recently, it was only the weak US market that kept investors on tenterhooks. But post-Brexit, concerns over slowing business in the UK has only added to the sector’s woes.

However, the long-term outlook for the Indian IT sector is bright as more companies worldwide adopt digital technologies.

Players such as Infosys or TCS, which have invested in digital technologies, are likely to gain market share. Also, given that Brexit is only a near-term challenge, market corrections can present a buying opportunity in large-cap IT stocks.

That said, it would be best to bet on companies that are more resilient to weather these challenges.

Among the large-cap IT stocks, Wipro looks most vulnerable given its concentrated portfolio, with a large share of revenues from financial services and energy.

The June quarter numbers of Wipro were disappointing. Adjusting for sales of the newly acquired company, HealthPlan Services, growth is lower than 1 per cent. The sedate growth in revenues could be explained by drop in revenues from energy, consumer and manufacturing verticals, especially from clients in India and West Asia and the Asia Pacific geography.

The pain is because of a drop in discretionary spends of clients mainly in the energy and utilities vertical. Wipro traditionally has higher project-based work with a higher-than-average share of discretionary spends of clients. So, in times of uncertainty, customers tend to hold back further spends. In the June quarter, the company’s top 10 clients made up 17.6 per cent of revenue, down from 18.2 per cent in the previous quarter and 20.1 per cent in the same quarter last year. The total number of clients added in the quarter was 50, down from 119 in the March quarter. There were no new client additions in the $100-million-plus bucket. This indicates the challenges faced by the company in client mining.

In the coming quarters, as the company restructures its India and West Asia business, there may be an added pressure on revenues as it reviews pricing and profitability of these accounts. For the September quarter, Wipro has guided for an organic revenue growth of 0-1 per cent in constant currency terms, which is lower than the growth reported in the same quarter last year.

The other challenge is due to rising attrition rates. In the June quarter, attrition increased to 17.9 per cent, from 16.4 per cent in the same quarter last year. Disappointments following the company’s new appraisal process stoked the rise in attrition rate, according to the management. This will need watching in the coming September quarter.

Wipro also faces pressure on the margin front. In the June quarter, the operating margin dropped 2.3 percentage points to 17.8 per cent. Peers — TCS and Infosys — too saw drop in margins, but relatively lower. In the coming quarters, restructuring in the India and West Asia business may bring more headwinds.

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