Wipro issues dull forecast ahead of new CEO's takeover

Bengaluru: Wipro Ltd reported a 0.3% rise (over the previous quarter) in third-quarter revenue in dollar terms, and despite giving a higher guidance for the current fourth quarter, India’s third largest software services firm will grow at its slowest pace in more than five years in 2015-16.

Some analysts say Wipro is yet to see the pay-off from changes made over the past nine months by its delivery head and chief operating officer Abidali Z. Neemuchwala, who will take over as chief executive officer on 1 February, and point to the significant challenges ahead for the new CEO. Among them are a tougher business environment and trying to get more business from existing clients.

Others see hope in these changes and are also taking cheer from the revenue growth in the three months ended 31 December.

Wipro posted a net profit of $338 million from IT services and revenue of $1.84 billion in the three months ended December. A Bloomberg survey of analysts had estimated the company would report a profit of $332.82 million on sales of $1.9 billion.

Wipro’s revenue grew 1.4% sequentially in constant currency terms.

Wipro expects its revenue to grow between 2% and 4% to $1.875-1.912 billion in the fourth quarter. Considering Wipro’s revenue totaled $5,464.3 million in the first nine months of this financial year, the company will end the year with an increase of 3.6% if it grows at the lower end of its guidance and will record 4.2% growth in dollar terms if it manages 4% growth in the fourth quarter.

Wipro’s at-best 4.2% growth will be the slowest since it grew 1.6% in 2009-10, and pales in comparison to its 7% growth last year. Last year, Wipro even managed to edge past larger rival Infosys Ltd in terms of incremental revenue. Infosys, which is in the midst of a remarkable turnaround, expects to grow between 8.9% and 9.3% in dollar terms this financial year.

Despite the unremarkable results, the Wipro management put up a brave face.

“The overall demand environment remains stable,” said T.K. Kurien, chief executive officer, Wipro. Kurien will become executive vice-chairman on 1 February when former Tata Consultancy Services Ltd executive Neemuchwala takes over as the CEO for a period of five years.

“I have been able to start a few strategic initiates in the last nine months. We have a solid strategic foundation and going forward we need to crank up our execution engine and that is what I will be focused on,” said Neemuchwala, who joined Wipro as chief operating officer last April.

In rupee terms, third-quarter profit grew 2% from the year-ago period to ₹ 2,234 crore, lower than a Bloomberg forecast of ₹ 2,242.30 crore. Revenue grew 7% from the year-ago period to ₹ 12,861 crore, higher than the ₹ 12,822.50 crore predicted in a Bloomberg poll.

Wipro managed to expand its revenue in the December quarter thanks to a 5.2% increase over the previous quarter in business from clients in the healthcare and life sciences industry. Healthcare and life sciences account for about 14% of Wipro’s total revenue. Wipro generates 28% of its total revenue from managing information technology infrastructure for its clients; the company calls this Global Infrastructure Services, or GIS. Revenue from GIS inched up 0.7% sequentially to further help Wipro post growth in a seasonally weak quarter, that has fewer working days on account of holidays.

Kurien said the overall pricing for large commoditized business remains under pressure. This is reflected in Wipro’s operating margin decline to 20.2% at the end of third quarter, as against 20.7% at the end of second quarter and 21.8% in the year-ago period. Wipro’s profitability was also hurt by a 40 basis point loss on account of the floods in Chennai late last year. One basis point is one-hundredth of a percentage point.

“The energy business continues to be soft. On the energy side, every time we have taken a bet on oil price to remain stable, it has surprised us with one more dip. Today in terms of oil price, the price of oil is cheaper than water. It’s a completely new normal and we don’t know how customers are going to react to this new normal,” said Kurien.

Neemuchwala declined to specify a timeline by when he expects Wipro to come back to industry-matching growth numbers, saying the management was in the midst of putting together a strategic roadmap. Experts said Neemuchwala’s job won’t be easy.

“Typically, a company which goes through any transition, takes at least two-three quarters to see the results,” said a Mumbai-based head of research at a domestic brokerage, speaking on condition of anonymity. “We saw this in the case of Infosys too, where we have started seeing Infosys deliver results only from the start of this financial year. But can Abid do the same?”

The analyst added that while Neemuchwala knows Wipro, having “worked on the delivery side for nine months”, the external environment “is only getting (more) challenging”. This person said that Kurien himself had “struggled for five years” trying to get Wipro to match the growth numbers of the industry.

For now, despite Neemuchwala taking measures to improve Wipro’s delivery side of business, including setting up a strategic initiatives group, the company continues to see a decline in revenue from its top customers: Wipro’s 10 largest clients accounted for 19.3% of total revenue in the December quarter as against 21% in the year-ago period. Revenue from the energy business, which accounted for nearly 14.5% of the company’s revenue, declined 1.7% in the quarter, while sales in Europe too declined by 1.7%. Business from clients in the US, the largest geography which brings more than 50% of Wipro’s revenue, did not grow while the company saw a 1.6% decline in revenue from clients in the banking and finance sector. The financial services segment accounted for 27% of Wipro’s $7.1 billion revenue for the year ended March 2015.

“We believe solid deal wins and new CEO Abid Ali Neemuchwala’s (takeover from 1 February) stress on execution are positives,” Abhiram Eleswarapu, an analyst at BNP Paribas, wrote in an investor note after Wipro declared its earnings. “Wipro has much to do on client mining given its relatively low annuity revenue, but initiatives around key account management, sales incentives and delivery managers pitching in for business are a start.”

Wipro shares rose 0.72% to end the day at ₹ 547.35 apiece on the BSE on a day the exchange’s benchmark Sensex fell 1.09% to close at 24,188.37 points.