Wipro’s buy-back will be good, but only just

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Wipro Ltd’s shares have risen 6.25% in the past three trading sessions. The excitement is partly driven by the company’s announcement that it will consider a buy-back of shares.

In fiscal 2015, Wipro had increased its dividend payout to 41% of net profit, compared with an average of around 29% in the preceding five years. It had said at the time that the increase in payout was after considering liquidity needs and strategic requirements.

With the buy-back announcement, the company is signalling that it is comfortable returning a greater proportion of its earnings back to shareholders. Needless to say, this is a positive. High cash balances are a drag on overall return ratios. Besides, in Wipro’s case, it is imperative that the company focuses on setting core operations right before attempting any ambitious mergers or acquisitions.

Of course, we will only know on 20 April, when the board meets next, how much cash the company will return to shareholders through the buy-back. After the recent change in dividend tax rules in the Union budget, a buy-back can also result in tax advantages, if executed through the stock exchanges.

Having said all this, the benefits from the buy-back will evidently be limited, and may well be priced in after this week’s rally. Investors are far keener to see a quick revival in the company’s fortunes. Wipro has lagged peers for years now, and there are still no signs of a pickup in growth.

Analysts at JPMorgan India Pvt. Ltd said in a note to clients earlier this year, “We believe that Wipro management has driven the right structural changes, but the results of these changes are not visible. The company continues to struggle with June quarter blues, while revenue growth is not broad-based. Some verticals/services/geographies drive growth, while others cause a drag on growth. Though the company has improved its hunting engine, mining remains weak. We believe the company needs to start delivering healthy growth in seasonally strong June and September quarters and bring consistency in its performance to attract investors’ interest.”

According to analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd, Wipro’s growth challenges are owing to “weaker positioning in developed markets (US/Europe), well entrenched competition in key growth segments (BFSI, IMS and BPO) and limited progress on client mining initiatives”. BFSI is short for banking, financial services and insurance; IMS stands for infrastructure management services and BPO for business process outsourcing.

By hiring the experienced Abidali Neemuchwala as chief executive officer effective 1 February this year, Wipro should be successful in fixing issues related to delivery. This can eventually result in better client mining. But whether the company improves its positioning in emerging growth areas remains to be seen. It’s little wonder analysts such as those at JPMorgan and Nomura continue to value Wipro at a substantial discount to peers such as Infosys Ltd and Tata Consultancy Services Ltd.