Wipro guides for fall in organic business, a first since financial crisis
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Wipro Ltd, which has been lagging peers for years, may face the infamy of becoming the first top-tier Indian IT services company to report a decline in revenue growth. It has forecast revenue of $1.955 billion at best for the June quarter, which translates to a growth of 1.25% against the reported revenue of $1.931 billion in the year-ago period.
But adjusted for the contribution from acquisitions, organic revenues are estimated to fall on a year-on-year basis. This is significant. The last time a top-tier Indian IT services company reported a year-on-year decline in revenue was during the global financial crisis.
In Wipro’s case, alongside the decline in revenues, margins are also falling at a higher pace compared to analysts’ estimates. It’s a double whammy of sorts, which should lead to a correction in the company’s shares when trading resumes on Wednesday.
Based on Mint’s back-of-the-envelope calculations, organic revenues are estimated to fall by 1.3% on a year-on-year basis in the June quarter. If one were to use the lower end of Wipro’s revenue guidance for the June quarter, organic revenues are estimated to fall by 3.4%. This year’s June quarter will include revenues of roughly $50 million from the Appirio Inc. acquisition, which was integrated with the company in November 2016.
While it’s true that growth has fallen for most firms, including industry leaders Tata Consultancy Services Ltd and Cognizant Technology Solutions Corp., these companies are still reporting growth in the high single-digits. Infosys Ltd reported a 5.3% year-on-year growth in revenue in constant currency terms in the March quarter, which is leading to chatter on the Street whether it will be the next in line to report a decline in revenue. But even if it does, that seems some time away.
This newspaper had asked the question Will Wipro soon post negative growth? after the company’s December 2016 quarter results; although hardly anyone expected the slide to be so quick. Wipro said on a call with analysts that its 2016 acquisition of HealthPlan Services, a business process as a service provider in the US health insurance market, has hit some rough weather. Soon after the acquisition, the company had won new projects, which have now been cancelled owing to the new government’s plan to have new regulations for the healthcare industry. The company expects these projects to fully ramp-down by the end of June, after which growth of the segment should normalize. Besides, its India and Middle East business segment will take some more time to bottom out. In the March quarter, revenues of this segment fell over 7% year-on-year in constant currency terms.
As a result of these blips, Wipro’s performance in the June quarter is expected to be hit badly; on a sequential basis the company has guided for flat revenues at best and a drop of 2% at worst. Considering that the June quarter is seasonally a stronger quarter, the company’s guidance is particularly worrying. Wipro expects growth to pick up later in the year to industry levels, after the above-mentioned headwinds cease; although given its recent track record, that statement sounds hopeful rather than confident.
“Wipro has had one too many false starts as far its recovery goes. It’s best to wait and watch, rather than get carried away by the management’s optimistic outlook for the second half of the year,” says an analyst at a multinational brokerage firm.
Also, while Wipro is pointing out to troubles in certain industries as reasons for its lacklustre performance, analysts have been underwhelmed by the company’s overall execution. Besides rapidly shrinking growth rates—now in negative territory—it also disappointed with a 70 basis points drop in operating margin to 17.6% after adjusting for exceptional items. With the currency having appreciated meaningfully this year, margins may settle below 17% in FY18, points out the analyst.
Interestingly, despite its continued weak performance, Wipro shares have risen by around 4% year-to-date, while the Nifty IT index has fallen 3%. After the March quarter results shocker, the stock looks ripe for a correction.