Wipro’s hopes of recovery are looking like a pipe dream2 min read . Updated: 18 Oct 2017, 08:05 AM IST
Wipro missed the Street's growth estimates by a notable margin yet again in the September quarter
Wipro Ltd has been on a multi-year quest to return to industry growth rates; its last estimate was that growth would pick up to match the industry’s pace by the end of the current fiscal year (FY18).
But that is increasingly looking like a pipe dream. The company missed the Street’s growth estimates by a notable margin yet again in the September quarter. IT services revenues increased just 0.3% on a sequential basis in constant currency terms, the same rate of growth as in the June quarter.
What’s more, it’s lower than the 1% sequential growth analysts had been expecting; and the guidance for the December quarter suggests growth will remain sluggish. “We do expect acceleration in revenue; and assuming industry level growth rates by Q4 is a stretch," says an analyst with a domestic broking firm.
Of course, the asking rate for Wipro is also gradually coming down, with the drop in industry growth rates. But while that makes things look better arithmetically, the task itself may be getting even harder, given the sluggishness in demand overall.
The company’s year-on-year growth stood at merely 2.8%, far lower than the mid-to-high single-digit rate at which the industry is growing. Tata Consultancy Services Ltd, in comparison, grew revenue by 7.1% in the September quarter.
Adding to the scepticism is subdued performance so far this fiscal year. Even if one takes the upper end of the revenue guidance for the third quarter, growth in the first nine months of FY18 works out to 5% (and some of this is thanks to contributions from acquisitions).
That said, the analyst cited above says that historically the second half of the year has been better for Wipro compared to other larger companies in India. A silver lining in last quarter’s results was that the banking, financial services and insurance business vertical, a large business division, continues to do well, supported by deals in the digital space. Revenue from top customers increased, indicating client mining benefits. Operating margins expanded despite the impact of wage hikes.
But these positives are being overpowered by subdued overall growth rates. Adding to the concerns is continued weakness in communications, healthcare and life-sciences divisions, which together last quarter generated one-fifth of Wipro’s revenue. According to the management, the communications division has bottomed out and should see growth from hereon. But healthcare remains volatile and performance of this division in the third quarter is expected to be dependent on enrolments in the Affordable Care Act in the US. While that raises questions about a sharp increase in growth rates in the near term, much depends on recovery in other business verticals, namely communications and energy.