The nearly six per cent fall in Wipro Ltd’s share price this morning, due to caution expressed by many foreign brokerage and analyst firms, may not be an immediate cause of concern.
Many analysts had expressed caution after the company announced its Q2 results of FY21. Though its revenue growth during the quarter beat market estimates, the company’s growth fundamentals remained weak when compared to its peers in the IT industry. During the Q2 of the FY 21 the company's net profit rose 3.15 percent over the previous quarter to Rs 2,465.7 crore in the July-September period. The bottom line had, however, taken a hit due to a deferred tax impact of Rs 1,600 crore and a decline in other income.
For market experts and analysts, this may not be a cause of concern as with revenue growth, the company is strongly positioned and is on a path to recovery. It needs to be recalled that both TCS and Wipro experienced a sharp decline in share prices post the pandemic. Both recovered all of its lost value by August. It also needs to be observed that fundamentally, the projections for the IT sector are bullish. Particularly, the pace of transformation and technology adoption post crisis indicates that there might be significant opportunities for firms such as TCS and Wipro to win new mandates in a market that has a historic openness to change and adopt fresh ideas.
Wipro had also announced that it will buy back shares worth up to Rs 9,500 crores at Rs 400 a share. It became the second company after TCS to do so recently. Experts say that it may be difficult to ascertain the buyback motivations for both these firms, it is well understood that if one is bearish on the market outlook for one's sector, it is prudent to deploy cash for buybacks rather than returning it as dividend. This serves as a hedge for weaker markets and lower earnings ahead, where a lower dividend could hammer the stock.
“With lesser shares outstanding, both TCS and Wipro are better positioned to preserve their dividend payouts. In the event that scaling back of buybacks is required, the impact on a stock performance is limited,” says Utkarsh Sinha , managing director Bexley Advisors.
“Alternately, if the management's perspective on the price is bullish, the buyback could also signal that despite the value gained back post the April dip, management believes there is still headroom in the stock and the buyback represents an opportunity to buy while the asset is undervalued,” he adds.
There is no doubt that Wipro is gradually moving towards a deal pipeline at pre-COVID-19 levels. The company has also had broad-based recovery across verticals, continued margin resiliency, and strong cash generation which have been the key positives for the company. The management's guidance for revenue growth in the range of 1.5 percent to 3 percent in Quarter on Quarter in Constant Currency terms in the Q3 FY21.
A report by Motilal Oswal states that the key contours of the new CEO Delaporte's new strategy growth from focused sectors or markets, continued investment in talent, and a simplified operational model to help improve focus on customers are the steps in the right direction. The report further states that the revenue growth for Wipro was broad-based, with the majority of verticals reporting above company growth. Among geographies the recovery was driven by the Americas (2.2 percent QoQ and the Rest of the World with 3.7 percent while Europe came in flat. The margin improvement in the company was driven by operational efficiency offset by currency impact due to In appreciation in Indian Rupee.
Operational improvement of the company also factors consisted of higher offshore revenues, increased utilization, reduced subcontractor expenses, and lower attrition. Interestingly Wipro had a cash balance of INR 410 billion including investments as in Q2 FY21.
It also needs to be observed that revenue growth also saw broad based recovery sequentially, led by different verticals such as communications, consumer, healthcare, BFSI and Manufacturing though there was softness in the technology vertical. A report by Emkay Global Financial Services pointed out that Wipro has made some progress in accelerating growth over the last few quarters but it is still not broad-based and consistent and implications of changes in the business strategy under new leadership need to be seen.
An analyst report by HDFC Securities also indicated that the deal pipeline for Wipro remains strong and sales activity is picking up that is driven by higher cloud adoption. The company under the new leadership will increase focus on client mining and will towards large deal wins, leveraging partner ecosystems and higher investments in talent.
“The goal is to make Wipro more lean operationally and deliver profitable growth. The key positives of the company include strong guidance despite furloughs, pick-up in deal activity and wins, robust cash generation and buyback. The company's acquisition of Eximius Design is also a positive move. Outlook for the company is positive for the BFSI and the consumer vertical and technology will bounce back in the next quarter,” says Amit Chandra, Assistant Vice President at HDFC Securities.
