Wipro's first quarter show points to multiple battles ahead

• After posting a fall in Q1 revenue, Wipro signalled another weak quarter ahead.
• Wipro won large deals and deferred wage hikes but that has not added to the topline.
• Wipro has high exposure to consulting business, which is discretionary in nature.
• Most analysts believe that Wipro’s performance will be worse than what the management has guided for.

With heightened demand uncertainty and an attendant softness in revenue, the IT sector is heading for tougher times. And analysts believe that Bangalore-based tech major Wipro will bear the brunt of the adversity, as it signalled another weak quarter ahead after reporting a subdued first quarter.

For the quarter ended June 30, Wipro's constant currency revenue fell 2.8% from the last quarter to $2.78 billion, in line with analyst expectations. For the July-September quarter, it expects revenue to either fall by 2% or gain by 1%.

“We are in a market that could evolve one way or another,” Thierry Delaporte, Wipro’s managing director and chief executive officer said explaining the guidance range at Wipro’s Q1 earnings press conference on Thursday.

Deals in but revenue low

What’s worrying analysts more is the fact that the tech major has done most things right this quarter — won large deals and even deferred wage hikes to the third quarter — but none of that seems to be adding either to its topline or the bottomline.

“A weak discretionary spending environment is leading to leakage of revenues and offset(ting) benefit of large deal wins. Multiple large deals signings in the past few quarters failed to prevent revenue deceleration and even decline,” said Kotak Institutional Equities, which cut its FY24-26 revenue estimates for Wipro by 2-5%.

The company’s total bookings stood at $3.7 billion, down 10.7% from last quarter.

“Management indicated weak macro and uncertain environment leading to postponement of discretionary spends – resulting in reducing correlation between deal flow and revenue growth,” said Nuvama Institutional Equities, which cut its FY24 growth estimates by 3.3%.

Most analysts believe that the company’s performance would be worse than the company’s estimates. The number of deals might also go down thanks to uncertainty in the environment. Delaporte has said that the IT services demand is normalising after a sharp spike in spending seen during the second half of the pandemic.

As more companies move to cut discretionary spends, Wipro will be the worst hit among peers. Also, as IT budgets truncate, companies will go in for vendor consolidation and Wipro is expected to be most affected by this trend.

“Wipro’s lower-than-peers’ growth is attributed largely to its relatively higher exposure to consulting, which is discretionary in nature,” JM Financial said.

The consulting-related spends will resume only once the macro headwinds start receding. JM Financial, however, says that when the drag on discretionary spending peters out, Wipro will be in a good position to gain from it. The brokerage adds that the IT services company has shown consistent deal wins – at $12.3 billion over the past nine months. Its $100 million client bucket has also doubled since October 2020.

Deferred wage hikes won’t arrest the slip

Wipro’s headcount has declined by a significant 8,800 during the quarter. Consequently, its net utilisation – excluding trainees – improved to 83.7%, from 81.7% in the last quarter. Attrition was down to 17.3%, and voluntary attrition has also hit an eight-quarter low.

Moreover, the company said that it would give out only 80% of its variable pay this year. “Despite deferring the wage hikes and a sharp decline in net headcount, Wipro expects the softness in profitability to continue in the near term on account of adverse operating leverage,” said Motilal Oswal.

The brokerage believes that the IT services margins for FY24 will be at 15.8%, much below the management’s medium-term guidance of 17-17.5%.

The slowdown and continued underperformance apart, Delaporte is spearheading a turnaround in the company by simplifying organisational structure and shifting focus to large deal wins especially in the US and Europe market — all to bring the IT services company up to speed with its peers.

Analysts, however, believe its ability to chart this path is getting harder as the going gets tough.

$WIPRO.NSE stock has been in a range of 380-410 levels for last 10 Months and now after the completion of Buy Back its showing some sign of strength,, the momentum is stock will pick up with better earning estimated from the IT sector,, once stock breaks 415 levels it can go up to 440 levels in medium term and 500 in long term

— (@avinashgoklani) July 14, 2023

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