Why Wipro continues to trade at discounted valuations to its peers

Backed by revenue contribution from the Appirio (US-based) buyout, Wipro managed to deliver in-line constant currency revenue growth of 1.7 per cent on a sequential basis for the March quarter (Q4). Healthy growth in key verticals of finance solutions, manufacturing and technology and consumer businesses fuelled revenues of the company in Q4. Among other positives is operating profit margin, which at 18.3 per cent came in higher than Street expectations of 17-17.7 per cent. While the number was stable on a sequential basis, it was aided by higher employee utilisations as well as healthy revenue growth. Both its key markets — the US and Europe — also grew at a healthy clip in Q4 and aided top line. Lastly, its net profit grew seven per cent sequentially to Rs 2,261 crore and was well ahead of Bloomberg consensus estimates of Rs 2,123 crore, aided by lower interest costs as well as tax rates. 

But investors should take note of headwinds at the industry and company levels, and the one-off in net profit. The company sold its EcoEnergy division for $70 million. The profit on account of this transactions is reflected in its profit and loss statement. 

Second, the guidance given by Wipro is also rather weak as the management expects dollar revenues to remain flat or even fall by two per cent in the current quarter on a sequential basis. This suggests the company may struggle to sustain this revenue momentum, which is a prerequisite for a re-rating of the stock price. 

Third, Wipro, which derives a good chunk of its revenues from the Affordable Care Act — popularly known as Obamacare — witnessed a two per cent sequential fall in health care revenues in the quarter as clients were on a wait and watch mode amid the US government’s efforts to repeal and replace the programme. Developments on this front, too, need to be watched closely, given that the health care segment now accounts for about 15 per cent of revenue.

It is also important the company improves its organic revenue growth, which is necessary to prop up investor sentiment. That’s because, for the year ending March 2017, too, Wipro (like previous years) lagged peers such as TCS and Infosys. Wipro’s constant currency revenues grew seven per cent in the year, compared with 8.3 per cent each for the latter two. This is the key reason why the Wipro stock continues to trade at discounted valuations to its peers. At 13x FY18 estimated earnings, Wipro’s valuations are undemanding when compared to peers — TCS trades at 17x FY18 estimated earnings, and Infosys at 14x. 

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