Large-cap IT company Wipro Ltd’s March quarter earnings were disappointing. Shares of the company were down 2.5% in early trade on NSE on Monday.
In Q4FY22, its IT services revenue grew 3.1% sequentially in constant currency (CC) terms, not meeting the consensus estimate of 3.4%. Ebit margin fell 60 basis points sequentially to 17%. Ebit is short for earnings before interest and tax. One basis point is one hundredth of a percentile. Analysts at JM Financial Institutional Securities Ltd note that the Ebit margin is the lowest since the 1QFY19 levels were adversely impacted during the last 18 months by the weak impact of the acquisition by Wipro.
For Q1FY23, Wipro IT services revenue has guided for 1-3% sequential CC growth. This guidance does not include contributions from its recent Rising acquisition. The company’s management is confident of maintaining the pace of revenue growth and achieving double-digit growth in FY13.
However, analysts do not share this optimism. In fact, they note that Q1FY23 revenue growth guidance is not only below 2-4% sequential revenue growth guidance for the past two quarters, but also below consensus expectations.
Moreover, some of them are also worried that Wipro’s turnaround story may lose its steam. Note that bluechip IT stocks have corrected in recent months with the Nifty IT index falling 21% so far this calendar year; Shares of Wipro have fallen 31 per cent.
“The under-performance stems from growing skepticism around the turnaround story after two quarters of average QoQ growth in both 3Q and 4Q in FY22,” said analysts at Nirmal Bang Institutional Equities. Moreover, the promise of ‘profitable growth’ has been dented with margins resetting downwards a few times, the domestic brokerage house said in an April 30 report.
Wipro’s margins are expected to remain low in the near term due to supply side challenges and planned investments. However, in the medium term, the management maintains it at 17-17.5%.
Sharing a similar concern, analysts at Motilal Oswal Financial Services Ltd have lowered the stock’s FY23/24 earnings per share forecast by 1.3%/1.6% respectively. The brokerage house said it would await further evidence of the implementation of Wipro’s latest strategy and a successful turnaround from its growth struggles, before getting more constructive on the stock.
Investors believe that Wipro shares saw a sharp jump and re-rating after Thierry Delaporte took over as CEO amid the pandemic. Under Delaport, Wipro is driving its growth primarily through acquisitions.