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Business News/ Market / Mark-to-market/  What’s behind the remarkable resilience of Wipro shares?
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What’s behind the remarkable resilience of Wipro shares?

For a company that has consistently lost market share in the past three years, and with no signs yet of a recovery, Wipro's shares have done remarkably well

Graphic: Ajay Negi/MintPremium
Graphic: Ajay Negi/Mint

For a company that has consistently lost market share in the past three years, and with no signs yet of a recovery, Wipro Ltd’s shares have done remarkably well. As the chart alongside shows, they have matched the returns of peers in the past three years.

But note that in the same period, revenue of Wipro’s mainstay IT services business has risen at an annual average rate of around 6%, far lower than the 12.1% growth in revenues of the four other largest IT services companies. And this year promises to be no different.

Adjusted for acquisitions, Wipro’s revenue was flat in the June quarter. And the company has also guided for 0-1% growth in the September quarter. In other words, the needle is barely moving in what are the best quarters for the IT services industry. In terms of demand, the December and March quarters are relatively softer.

Worse still, the worry about the company’s margins is getting larger. On a year-on-year basis, operating margin of the IT services business has declined by nearly 300 basis points to 17.8%. About two years ago, the company had margins of over 24%. One basis point is one-hundredth of a percentage point. One way to look at this is that the company is trying hard to win back market share. The investments it has made in winning new business and pricing contracts competitively is leading to far lower margins. Unfortunately though, these investments aren’t leading to results as far as revenue growth is concerned. Investors should be worried.

Also Read: Wipro follows peers with weak June quarter results

According to the company’s management, Wipro gets a far larger share of revenues from discretionary projects. In the backdrop of increasing uncertainty in the global economy, this business gets hit the most, they add. Wipro, of course, also has a fairly high exposure to the energy and utilities business, which has been hit owing to the sharp correction in crude prices. Until these clients see stability in crude oil prices, they are unlikely to step up IT services spending. The company also said that the shift in spending to digital services creates headwinds for traditional services, as the former is funded through cost savings in the latter. Thus, despite progress with digital services, overall growth has suffered.

So, how is that Wipro shares have matched the returns of peers and even enjoy higher valuations than companies with better growth prospects? One major factor is the company’s relatively low free float. It has also helped that the company has increased its payout to shareholders. But all told, it’s clear that investors have been tremendously patient waiting for the company’s recovery.

The writer does not own shares in the above-mentioned companies.

Also Read: Wipro won’t buy revenue by sacrificing margins: CEO Abidali Neemuchwala

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Published: 20 Jul 2016, 07:35 AM IST
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