Decoding Wipro results: Q2 revenue growth slowest among peers

Shares of Wipro fell as much as 6.3 percent after its July-September revenue in dollar terms grew 2.7 percent sequentially, lagging other major IT services exporters.

HCL Technologies Ltd’s dollar revenue grew 3.6 percent in July-September from April-June, while it was 3.8 percent at No. 2 Infosys and 6 percent of industry leader Tata Consultancy Services Ltd .

Bangalore-based Wipro, India’s third-largest IT services company, said on Tuesday consolidated net profit rose an annual R28.5 percent in the three months ended September 30 to Rs 1932 crore against expectations of Rs 1860 crore.

Goldman Sachs maintains a “sell” rating on the stock.

“Wipro’s 2.7 percent qoq growth remains slowest among large peers despite strong deal announcements in the recent past and 3Q guidance also does not suggest a strong ramp up,” Goldman said in a note on Tuesday.

Even Antique Broking believes Wipro’s growth rates is likely to lag peers.

“Unlike its peers, who reported strong growth across key verticals and services, growth for Wipro were led by few services/verticals. For instance, both TCS and Infosys reported above average growth rates for most verticals, excluding telecom. We think strong growth in key verticals BFSI (27% of total revenues), Manufacturing (19%) and media/telecom (14%) is a prerequisite for the company to match its peer growth rates. Consequently, we feel growth rates are likely to lag its peers,” it said in a note.

The brokerage has a hold rating on the stock.

The company management said the current demand from clients is patchy but strong.

In the boardroom discussion on CNBC-TV18, Wipro chairman TK Kurien said the company’ s effort is to find the right portfolio mix. In the banking, financial services and insurance vertical, insurance is a big market for the company and can make an impact there, he said. Meanwhile, in manufacturing, Wipro is overweight on hi-tech which results in ups and downs.

“The company needs to balance this by focusing on other sectors like auto,” said Kurien.

Dolat Capital, which has a reduce rating on the stock, believes Wipro will remain an underperformer as it has few drivers of growth in its portfolio.

“We believe sporadic nature of its growth lacks the confidence of a strong recovery in near term and thus does not see it getting its growth aligned with peers in FY15.”

According to Kotak Securities, even though Wipro’s earnings have met estimates,it continues to struggle in core areas.

“Muted growth in core areas and important geographies indicates that three-year turnaround effort remains a work in progress. We raise our earnings estimates by 4-5% for FY2014-15E on currency and OPM-led surprise and target price by 8% to Rs 510. REDUCE,” it said.

Moreover, even though the company has marked a 260 basis point gain in its operating margins at 20.8 percent, Dolat believes it would be tough for Wipro to improve margins here on.

“We believe it would be tough for Wipro to improve OPM hereon given its sustained investments needs in Sales &Marketing (cost per employee is also growing) to shore up traction, declining profitability in product business and persisting attrition challenges.

Wipro shares were down 5.7 percent at 1000 am. However, the management sees Wipro leading industry growth by the next fiscal.

With inputs from Reuters