Mumbai: Just when it was thought Wipro Ltd had recovered from its growth problems, its March quarter (Q4) results have once again raised uncomfortable questions about revenue growth.
Revenue growth slowed just two quarters after acceleration. The sequential constant currency revenue growth stood at just 1% in Q4. In the previous two quarters it grew in the range of 2-3%. This is in contrast to the revenue acceleration theme investors are banking on.
Year-on-year growth rate declined marginally last quarter, unlike its peers, where growth rates had increased last quarter. As was the case with Tata Consultancy Services Ltd (TCS) and Infosys Ltd, Wipro said it is seeing strong deal momentum and has a healthy pipeline, which should help it deliver better FY20 than FY19. However, mere 5.4% growth in FY19 means the bar is not high. TCS and Infosys clocked 11.4% and 9% growth, respectively, in FY19.
Worse, Wipro’s guidance of a -1% to 1% revenue growth on a sequential basis in the June quarter provides limited confidence. The guidance of revenue contraction in a worst-case scenario goes against the strong deal momentum commentary.
According to the management, some large projects it has won require time to ramp-up. Besides, the healthcare and manufacturing business verticals, which generate a fifth of Wipro’s revenue, are struggling for growth and are impacting overall growth rates.
The management says it is focusing on earnings accretive business and is selectively participating in traditional contracts. This is leading to better quality earnings reflective in margin improvement (FY19 vs FY18) and cash flow generation. But as one analyst with a domestic broking house points out, the margin improvement is coming on a lower base vis-à-vis larger peers TCS and Infosys. And, in any case, the depreciation in the rupee has aided profitability for most IT firms in FY19.
In any case, margin improvement can only take earnings so far. Ultimately, revenue needs to grow at decent rates for investors to be impressed. Wipro’s key business verticals show uneven recovery, with growth largely being driven by the banking financial services and consumer business units. Three business verticals—healthcare, manufacturing, technology—saw a year- on-year fall in revenues in constant currency terms last quarter.
At 16 times estimated FY20 earnings, Wipro is trading at a discount to TCS and Infosys’s price-earnings multiple of 22 times and 19 times, respectively, reflecting subdued expectations on the Street. The widening gap in revenue growth rates may further deepen the valuation discount. And as if this wasn’t enough, Wipro has also reported issues related to cybersecurity. If the matter isn’t contained quickly enough to the satisfaction of clients, it may well have the potential to derail growth further.