At Wipro, things are getting worse before they get better


Wipro Ltd has underperformed peers for so long that expectations from it typically run low. It was no different with the company’s March quarter results announcement; analysts were expecting organic growth of only around 1% compared with the December quarter.

But Wipro fell short of even these low expectations. Its revenues were flat after adjusting for the impact of two acquisitions it closed during the March quarter. Worse still, it has guided for between 1% and 3% growth for the June quarter, even though the full contribution of the HealthPlan Services acquisition will add about two percentage points to growth. At the mid-point of its guidance, therefore, organic growth is again expected to be flat.

While Wipro has taken various steps to stem the decline in its growth rate, the fruit of these actions is still not visible. Apart from the troubles in the energy and utilities industry, which contributes to 15% of total revenue, the company is also grappling now with challenges some of its banking and financial services clients in Continental Europe are facing. In the energy and utilities segment, Wipro said that discretionary spending will come back when there is some stability in gas prices.

Meanwhile, the gap vis-à-vis industry growth rates has only widened. On a year-on-year basis, growth in organic revenue stood at merely 3.7% in the March quarter. The industry is growing at around 10% in dollar terms. Margins were below estimates, too, despite an unexpected pickup in employee utilization benefits from the rupee’s depreciation. The company said that margins in its India and Middle East business fell because of certain investments, whereas commensurate revenues from these initiatives are still to be recognized.

The only silver lining was the company’s announcement for buy-back worth Rs.2,500 crore. Of course, the promoters are likely to receive a large portion of this, in proportion to their 73% stake. Even so, the buy-back using the tender offer route is a tax-efficient way to return cash to shareholders. Along with the dividends announced for the year, Wipro has increased its payout ratio to 48% in fiscal year 2015-16. In FY15, it paid shareholders 41% of the year’s profit, and in the preceding four years, its payout was around 30% of net profit. The higher payout will result in better return ratios, and the lower cash balance could act as a hurdle against large and risky acquisitions.

But the positives from the buy-back are captured in the company’s shares, which have risen by nearly 10% in the past five trading sessions. The disappointing March quarter results should, therefore, result in a correction when trading resumes on Thursday.