Here's why Wipro may be going the Infosys way

Shares in Wipro, India’s third-largest software services provider, fell as much as 11.25 percent on Monday after it gave weaker-than-expected quarterly sales forecast on Friday. Wipro joined No. 2 player Infosys in delivering tepid revenue outlook, citing a delay in the closure of deals. The company’s zero sequential growth in IT has also raised doubts over whether Wipro, like Infosys, is loosing out to its competitors TCS and HCL.

On the Sensex, Wipro remained the worst performing stock. The BSE IT index was down 2.49 percent while the BSE Sensex was 0.31 percent higher at 19,076.24. The two biggest reasons for Wipro’s slump today are flat sequential growth for the fourth quarter ended March 2013 and weaker-than-expected sales guidance. The company saw sales expanding 5% against the industry average of a little over 10%.

Wipro reported a 16.7 percent rise in quarterly profit to Rs 1729 crore on Friday, slightly better than Street expectations but revenue rose just 13 percent year-on-year or 0.3 percent quarter-on-quarter to Rs 9,613 crore.

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“Wipro reported a disappointing Q4F13 and gave muted guidance for Q1F14e. We believe the stock could correct by 5% for a day or two based on its Q4 performance,” said SKS Capital in a research report.

During the quarter, Wipro’s IT Services revenues rose 13% to Rs 8,554 crore, while net profit was up 10% to Rs 1,727 crore. This was less than even the company’s own guidance.Wipro is expecting revenue of $1,575-1,610 million from its IT services business in April-June, which when compared to revenues of $1585 million in January-March quarter, indicates a 0.6 percent decline at the lower end and just 1.6 percent uptick at the higher end.

Analysts are also concerned about the company’s revenues from its IT services. The weak growth was due to lower working days and lower price realisation on account of across currency impact, noted BRICS Securities.The brokerage also expects margins to decline due to visa costs and salary hikes in June.

And unlike its peers, which saw an uptick in the banking, financial services and insurance (BFSI) space, Wipro continued to see a fall in its BFSI, telecom and media segment during the quarter. The management also reported seasonal softness in India and the Middle East.

“The key disappointment from Wipro’s Q4 FY13 results was the weak dollar revenue guidance of 0.3 to 1.6% qoq growth. Traditional weakness of India/Middle East business in Q1, lack of traction in discretionary projects as well as decision making delays led to the lackluster guidance. A patchy growth across geographies and lack of discretionary spending do not indicate a strong recovery in demand environment impacting Wipro performance,” said brokerage IIFL.

JP Morgan has downgraded Wipro and lowered its price target as it believes the company continues to struggle with its recovery and does not give any definitive signal that it is about to turn the corner in the next six months. It expects the company to show improvement only in FY15 and not FY14.

“The quarter came in below the street’s expectations.. However, what worried us a bit more is the tepid revenue growth guidance for 1QFY14 (-0.6 percent to +1.6 percent growth Q/Q), which means that recovery coming in time for a close-to- Nasscom industry average growth in FY14 seems unlikely,” the report said.