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Low growth, stable margins continue to define performance at Wipro

Livemint logo Livemint 15-01-2020 Mobis Philipose

Wipro Ltd’s run of sluggish growth continues, with the company reporting year-on-year growth of merely 3.3% in constant currency terms for the December quarter. Last week, Infosys Ltd reported growth of 9.5%, and average growth of the top three companies in the industry is estimated to be around 9%.

The logo of Wipro is seen inside the company's headquarters in Bengaluru. © REUTERS/Abhishek N. Chinnappa The logo of Wipro is seen inside the company's headquarters in Bengaluru.

Growth in Wipro’s key banking, financial services and insurance unit stood at only 1% on a year-on-year basis. The company has a relatively higher exposure to clients facing troubles in this segment, which is reflected in the poor growth.

Revenue from the company’s top client, which has been another trouble spot for Wipro, has come down further to 3% of total revenues. In the year-ago period, the top client had accounted for 3.7% of revenues. This implies a sharp drop in revenues from the top client.

Still, it isn’t like the rest of the business is growing at a brisk pace. Besides, growth at its US-based acquisition, Healthplan Services, has been affected by regulatory uncertainty in the healthcare space. However, the health business unit at Wipro did well overall to post sequential growth of 3.4%.

The company has guided for 0-2% sequential growth in revenues for the March quarter, which is a tad disappointing, given that Q4 is a seasonally better quarter. Analysts at Kotak Institutional Equities had written in a note to clients that the company may guide for growth of between 0.5% and 2.5%, since Wipro has historically done relatively well in the fourth quarter. While the Q4 guidance is prima facie a climb-down from the Q3 guidance of 0.8-2.8% sequential growth, note that revenues in the December quarter were helped by acquisitions.

The lower-than-industry growth has naturally led to underperformance in the Wipro stock. In the past year, the stock has been flat, even as the Nifty IT index has risen by about 10%.

Wipro now trades at around 13.5 times estimated earnings for FY21, which works out to a discount of about 27% to the one-year forward price-earnings multiple of Infosys.

The silver lining is that Ebit (earnings before interest and tax) margin rose 30 basis points, on the back of an improvement in Q2 as well. While profit margins were helped by the depreciation in the rupee, the steady trend in margins in the past couple of quarters is heartening.

However, the key for investors is that growth picks up, and the company’s guidance for the March quarter suggests this is unlikely to happen anytime soon.

The redeeming feature of the Wipro stock is that its valuations somewhat reflect this underperformance.

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