Wipro’s Q3 print shows revival, but valuations may not be sustainable2 min read . Updated: 13 Jan 2021, 10:58 PM IST
- Like its peers, Wipro has got the benefits of lower costs and better offshoring mix
- Wipro continues to win large deals, which could aid revenue in the coming quarters
Wipro Ltd has been one of the slow-moving IT firms over the past few years, but with a new chief executive and tailwinds for digital transformation among clients, the firm was expected to reverse the course. To an extent, the company has got some growth back in the third quarter. The 3.4% sequential jump in Wipro’s revenue in constant currency terms was at the upper end of the company’s guidance.
But this is still behind the 4.1% and 5.3% jump in peers Tata Consultancy Services Ltd and Infosys Ltd’s revenues, respectively. And, the trend of Wipro being a laggard to its larger peers continues. Note that while TCS has returned to positive growth year-on-year (y-o-y), albeit just 0.4%, Wipro’s revenues are down by about 2% y-o-y.
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Of late, the Wipro stock has been outpacing the sector on the assumption that the recent large deal wins would help it catch up in terms of incremental growth.
“But since the third quarter does not confirm that, the stock re-rating may not sustain," said an analyst at a domestic brokerage firm, requesting anonymity.
Besides, compared to its larger peers, the company’s banking and finance vertical has also lagged with growth at just 1.2%. However, some of its other business units such as manufacturing, technology, consumer business, health business, and energy and natural resources are showing growth in excess of 4%, which is encouraging.
Nevertheless, the company continues to win large deals, which could aid revenue in the coming quarters. In fact, the firm has again guided for growth of between 1.5% and 3.5% for the March quarter.
While this is conservative and not very strong, analysts expect growth at the higher end of the band in the next quarter.
Like its peers, Wipro has got the benefit of lower costs and better offshoring mix. The firm’s operating profit margin came in at 21.7%, which is one of its highest for the past several quarters. In fact, the Street was pencilling in flat margin growth due to wage hikes and promotions in December. The firm also seemed to have saved on transition costs from large deals.
In the March quarter, though, Wipro’s margins could come off a bit, as the company has announced wage hikes in January. However, the management expects margins to remain better than the second quarter as some of the cost savings are sustainable.
Wipro has kicked off a leaner structure from January, cutting down on the number of verticals and reporting heads. But the stock has made most of its gains from the re-rating in the IT sector post the lockdown. Its one-year forward price-to-earnings multiple stands at 24 times, as per data from Bloomberg. This is sharply higher than the company’s 14-16 times historical price-to-earnings multiple.