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Home / Market / Mark-to-market /  Infosys, Wipro face headwinds in attempts to regain growth leadership

In each of the previous six years, shares of Infosys Ltd and Wipro Ltd have underperformed those of industry leader Tata Consultancy Services Ltd (TCS). This year promises to be different. Already, in the first three months, they have outperformed TCS by 11% and 14%, respectively.

Of course, one can argue that this doesn’t count for much, coming on the back of the underperformance of 67% and 63%, respectively, in the preceding six years. Besides, a part of the outperformance this year is because investors became disenchanted with TCS after the company’s performance fell short of expectations in two consecutive quarters. Some caution while valuing the shares of the two companies is warranted as they face a number of headwinds in their attempts to return to industry growth rates.

But, first, it’s understandable why the reorganization efforts underway at the two Bengaluru-based companies have got some investors excited.

Since the arrival of Vishal Sikka, Infosys’s attrition levels have dropped, management churn has reduced, and the company has made promising sounds about better utilization of capital. Besides, it has reorganized its delivery structure along service lines, which, analysts say, will result in better skill development and employee utilization rates.

Wipro has changed the incentive structure of its sales team to accelerate growth. And, as a result of the efforts made earlier, the value of the total deals it won in 2014 rose considerably, compared with the preceding year, the company told analysts recently. It recently appointed a chief operating officer, promoted two executives to the rank of president, and appointed a new head for its digital business.

The big question, of course, is if this is enough. While Wipro can’t be faulted for not trying, not all analysts are impressed. Analysts at CLSA India Pvt. Ltd said in a recent note to clients, “Wipro has never been short on strategic focus over the past decade. It’s the execution that has been underwhelming." They add that while Wipro has been successful recently in new business development, or what is known as “hunting" the company’s growth has lagged that of peers because of its poor performance in mining existing clients, or what is known as “farming".

When the company met analysts recently, it said that four of its top 10 clients are facing troubles; two of them from the oil and gas sector, which is facing immense challenges because of the drop in oil prices. Wipro gets a far greater proportion of its revenue from this sector than its peers. In the near-term, therefore, growth will be under pressure.

Besides, as analysts at Nomura Financial Advisory and Securities (India) Ltd pointed out in a recent client note, even in the medium term, Wipro’s growth rates will be lower because of its relatively weaker positioning in developed markets and strong entrenched competition in key growth segments such as banking and financial services, infrastructure management services and business process outsourcing.

Similarly, Infosys has a smaller market share in service areas such as infrastructure management, business process outsourcing and engineering services, which are currently leading in terms of growth. In addition, a number of information technology companies, including TCS, have sounded cautious about their near-term performances, and it’s likely that the slight sluggishness in the sector will affect attempts by Infosys and Wipro to come back to industry growth levels.

Nomura’s analysts estimate an annual average dollar revenue growth of 12% for Infosys between fiscals 2015 and 2017, and 10% in the case of Wipro.

In comparison, the brokerage expects current growth leaders—TCS, Cognizant Technology Solutions Corp. and HCL Technologies Ltd—to grow at a faster pace of 14-18% during the same period.

Of course, the rate of underperformance is lessening. In the preceding few years, revenues of Infosys and Wipro have grown in single digits, while for its peers, revenue growth has been in the mid-teens.

In Infosys’s case, the extent of re-rating, however, has been substantial. From a discount of around 30% to TCS’s price-earnings valuation in the middle of last year, its valuation discount is now a little over 10%. It must be noted here that, apart from the pick-up in growth rates, investors are also enthused about Sikka’s intent to better utilize the company’s cash hoard. He has already announced a key acquisition, and is expected to announce a plan on the use of excess cash, while announcing the results for the current fiscal.

In terms of growth parameters, it looks like the current leaders will continue to grow at faster rates for some time. To expect Infosys and Wipro to join the league of industry growth leaders soon will be asking for too much.

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