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Wipro’s faith-based valuations

LiveMint logoLiveMint 21-07-2017 R. Sree Ram

Shares of Wipro Ltd have remained surprisingly resilient despite the company consistently trailing industry growth, which itself has lost some steam. In the past year, the stock was little changed, compared to a 10% drop in Infosys Ltd and 2% fall in Tata Consultancy Services Ltd (TCS).

A bonus issue, promise of a buyback and turnaround hopes may be helping investors keep faith in Wipro. But the June quarter results disappointed investors again. To begin with, the company continues to trail its larger peers Infosys and TCS. The year-on-year constant currency revenue growth for the June quarter stood at 3.4%, roughly half the pace its two bigger rivals reported.

Of course, the reported growth is not as bad as some investors had feared. The constant currency revenue growth on a sequential basis stood at 0.3% for the June quarter, while some expected constant currency revenues to drop from the March quarter.

Even so, that doesn’t provide much cheer. Profitability took a hit as adverse currency movement and wage hikes impacted margins.

Importantly, the company’s revenue growth forecast implies a slight drop in revenue (-0.5%) at the lower end of the forecast on a sequential basis. The higher-end guidance implies 1.5% growth. “Guidance is tepid, but needs to be viewed in the broader context of the commentary from its larger peers, who have been highlighting growth challenges,” says Abhishek Shindadkar, an analyst at Equirus Securities Pvt. Ltd.

The tepid growth projection reflects Wipro’s continuing challenges in its business verticals. The healthcare business has seen project cancellations after the change in government in the US. A recovery in the energy business and benefits from the restructuring in its India business are estimated to help the company attain industry-level growth rates by the end of the current fiscal year or the fourth quarter, said the management after releasing the June quarter results.

That indicates the recovery is still a work in progress. Given the nature of the challenges and its history of a long period of underperformance, investors would do well to wait for the positive commentary to translate into better revenue growth.

Nevertheless, that does not seem to bother investors much. The bonus issue and return of cash to shareholders—the Wipro board approved a buyback of Rs11,000 crore at a 19% premium to market price—may support the stock. But as Jefferies India Pvt. Ltd points out, despite the sub-par performance, Wipro has become the second-most expensive stock among large-cap information technology (IT) shares.

While that highlights the large mismatch between valuations and performance, much depends on the recovery in the second half of the fiscal year. “It is now trading well above its own historic average valuations and is now the second most expensive stock in large cap IT. This stock performance comes despite the poor quarterly results over the past few quarters and a lack of visibility on future growth and margins,” Jefferies India said in a note released last month.

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