IT services provider Wipro Ltd reported decent earnings in the June quarter. Its sequential constant currency organic revenue growth at around 4.9% was highest in the past nine years and above the management’s revenue guidance of 2-4%. Wipro also beat peers on this front. Tata Consultancy Services Ltd and Infosys Ltd saw constant currency growth of 2.4% and 4.8%, respectively in the June quarter.
In a post earnings conference call the company’s management said, this is the best ever quarterly results and Q1 saw Wipro report the highest organic sequential growth in 38 quarters.
Reacting to the earnings, shares of the company rose around 2% on the NSE in Friday’s opening trade to touch a new 52-week high of ₹589.
The company’s management guided IT services revenue to be in the range of $2,535-2,583 million in Q2FY22, which implies a 5-7% sequential growth. The management remains confident of delivering double-digit organic revenue growth in FY22. On a sequential basis, Ebit margins declined by 320 basis points (bps) to 17.8% on account of integration of low margin Capco business and several senior leadership hires during the quarter. Ebit is short for earning before interest and tax. One basis point is one hundredeth of a percentage point. Further, the company’s management has reiterated its Ebit margin guidance of 17-17.5% for FY22.
However, analysts are not so confident about Wipro’s growth sustainability given the lack of breath. “Unlike growth for TCS/Infosys in 1QFY22, which was broad-based, that of Wipro has been skewed. BFSI (ex-Capco), Healthcare (supposed area of strength), Technology and Manufacturing (together forming ~60-65% of revenue) delivered significantly below company organic growth (4.9%),” Nirmal Bang Securities Ltd said in a report. The domestic brokerage house cautions of a much higher deceleration for Wipro than its peers in FY23/FY24.
Secondly, the stock’s rich valuations despite relatively lower earnings performance, is adding to the discomfort. Bloomberg data shows that Wipro is trading at a one-year forward price-to-earnings multiple of 28 times. TCS and Infosys are trading at valuation multiples of 35 times and 33 times, respectively.
According to analysts at Emkay Global Financial Services Ltd, Wipro has low single-digit valuation discount to Infosys despite around 5% lower earnings CAGR expectations over FY21-24 and nearly 10% lower return on equity. CAGR is short for compounded annual growth rate.
Going ahead, it remains to be seen if Capco can be a big driver of growth in BFSI beyond FY22, analysts said.
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