Wipro continues to struggle for growth even in a seasonally strong period for the industry
Investors are, however, cheering thefirm’s commitment to its generous cash return policy
Mumbai: Wipro Ltd shares rose 4% to Rs270 on Thursday, making it the biggest gainer among Nifty 50 stocks. The reasons for the increase in valuations are not to be found in the company’s quarterly results, reported post markets hours on Wednesday. After all, revenues fell 0.7% sequentially in constant currency terms in the June quarter and growth in the September quarter is estimated to range between 0 and 2%.
With Wipro struggling for growth in the first half of the year, which is seasonally a strong period for IT services companies, there is hardly any hope of a revival in the second half of the year. “Wipro’s weak start to the year will lead to another year of mid-single digit growth," analysts at Kotak Institutional Equities said in a note. While an increase in profit margins had driven valuations last year, that is not the case this time around. “Ebit (earnings before interest and tax) margin at 16.2% disappointed relative to our expectation of 16.8%, especially given better rupee realizations," analysts at Jefferies India Pvt Ltd said in a note.
What then explains the optimism on the Street? Of course, one reason could be that since Wipro shares had corrected about 13% from their highs in mid-June, this is a sort of a relief rally. But according to an analyst at a multinational brokerage, “The only reason being cited on the Street for the rally in Wipro shares is that the company reiterated its commitment to its cash return policy through buybacks." After the government introduced a new buyback tax in this year’s budget, there were concerns that the cash return policy of some companies may get affected.
What’s more, Wipro’s dividends and buybacks translate into a 6% yield for investors, which is nothing to sneeze at.
But a moot question for investors is whether they can remain content with a decent dividend yield, when there are chances of giving up those gains in the form of capital losses. For one, Wipro’s revenue growth is hardly inspiring. Revenues grew 5.9% year-on-year on a like-to-like basis in Q1, far lower than the double-digit growth of Tata Consultancy Services Ltd and Infosys Ltd.
“We cut our revenue and earnings estimates for Wipro over FY20-21 to reflect weaker growth, a stronger rupee in FY20 and impact of weaker growth on margins. We maintain our ‘underperform’ rating as we expect Wipro to continue underperforming industry growth and believe it is over-valued at 16 times estimated FY20 earnings," Jefferies’ said in its note.
“Q1 results show that Indian IT companies are struggling for growth in general, and given that Wipro has been a laggard on this front, its challenges will be relatively higher," says the above-mentioned analyst.
If Wipro continues to disappoint on growth, investors will have to face the prospect of capital losses on their investment. But even otherwise, Wipro faces the overhang of high promoter ownership. With the budget suggesting a change in minimum public shareholding rules, Wipro’s promoters may well be forced to bring down their ownership. The resultant increase in supply of the stock can also hurt valuations.
Investors can cheer Wipro’s generous cash return policy if they want, but they can’t afford to ignore the company’s underlying financial performance