BackWipro: a longer wait for the turnaround
Wipro continues to face near-term headwinds such as the trouble in the oil and gas sector
Premium(Hemant Mishra/Mint)
Wipro Ltd’s revenue growth in the December quarter was the highest in the last 12 quarters, triggering hopes among investors that the company’s long-awaited turnaround was finally around the corner. Wipro shares have risen by 19% since the results announcement, compared with a 6.6% increase in the National Stock Exchange’s CNX IT index.
The company recently met analysts—first in New York and then in Bengaluru—and while there were some positive takeaways, there’s nothing much to get excited about.
Notably, the value of new deals won increased considerably in 2014 over 2013 and Wipro has changed its sales team’s incentive structure to further accelerate growth. In the near term, though, none of this may get reflected in revenue growth rates, as a few of the company’s top accounts are facing issues. Some of these clients are either from the troubled oil and gas space, while one or two of the clients in Europe are facing other problems. Wipro gets almost 17% of its revenue from the energy sector, the highest among peers, and the sharp drop in crude oil prices is likely to hit it the most.
According to the company, the remainder of its top clients are growing at a decent pace. Even so, investors will be disappointed that overall growth rates will still be materially below industry growth rates. Wipro maintained its forecast that revenue will grow by 1-3% in constant currency terms in the March quarter. In the seasonally weaker December quarter, revenue had grown by 3.7% in constant currency terms.
Just as the company has laboured to point out in previous interactions with analysts and investors, there are a number of changes it has made, both in its sales approach and delivery. Nevertheless, it continues to face near-term headwinds such as the trouble in the oil and gas sector.
Analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd point out in a recent note, “We see less growth upside potential at Wipro vis-à-vis HCL Technologies, Cognizant and TCS (Tata Consultancy Services Ltd) given: a) the weaker positioning of Wipro in developed markets, and b) the strong entrenched competition in key growth segments such as BFSI/IMS/BPO. We look for a dollar revenue CAGR of 10% over FY15-17 (vs 14-18% for HCL, Cognizant and TCS)."
What’s more, Wipro’s recent aggression in growing its business will entail higher costs and hence lower margins in the near term. Investors looking for quick results are likely to be disappointed.
The writer doesn’t own shares in the above-mentioned companies.
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