Why Wipro will struggle to report double-digit growth in FY23
4 min read . Updated: 13 Oct 2022, 12:36 PM IST
Premium- A weak show in the first half of this fiscal will drag Wipro's growth in FY23.
At Wipro Ltd, it is quite a reversal in fortunes when it comes to the company’s performance.
The country’s fourth largest technology services firm reported a 27.3% dollar revenue growth in the year ended March 2022, the fastest among all large IT firms.
But now it will struggle to even grow at 10% in the current financial year.
After a spectacular performance in his second year, Wipro’s chief executive Thierry Delaporte, who took over in July 2020, has run into difficult terrain. Both revenue and profitability missed analysts' estimates when the company reported its earnings for the July-September period on Wednesday.
Expectedly, investors dumped Wipro shares on Thursday: shares were down 5.65% at 9:36 on Thursday morning.
A weak performance in the second quarter came at the back of the lowest incremental revenue addition of $13 million in the April-June period.
Employee addition, an important measure of growth, was the lowest in the latest quarter under Delaporte, as Wipro saw a net increase of 605 employees in the July-September quarter.
You might also like
How this Mumbai couple got into goal-linked investments
Wipro expects revenue in the October-December to grow sequentially between 0.5 and 2% in constant currency terms. Cross-currency volatility will further eat into dollar numbers, as seen in the first six months of the fiscal. Even if the company manages a 2% sequential dollar revenue growth in the third quarter, Wipro will need to clock a 5.5% growth in the fourth quarter to end a 10% full-year revenue growth, according to Mint’s calculation.
This looks improbable.
Unsurprisingly, many analysts now expect Wipro to lag its peers.
“We believe Wipro will underperform peers on revenue growth over the next three years by 2-4%," Kawaljeet Saluja and Jaykumar Doshi, analysts at Kotak Institutional Equities, wrote in a note, dated 12 October, after Wipro declared its earnings.
Sequential incremental revenue growth shows that the company’s performance peaked in the first half of last year. Wipro did $262.1 million and $165.5 million in new business in the first and second quarters, respectively, of last year.
Since then, it has been a downhill journey.
The cornerstone of Wipro’s spectacular growth up until now was underpinned by the flurry of acquisitions. Under Delaporte’s watch, Wipro spent $2.63 billion to buy 10 companies that together added $1.16 billion to the company’s revenue in the last nine quarters, according to this paper.
Herein lies a lesson: companies that bank on acquisitions for revenue should do it gingerly. Business appears to be doing well, optically in the near term. But it pinches the profitability.
Wipro paid $1.45 billion to buy London-based Capco in March 2021. Capco’s promise was that it will aid consulting capabilities for Wipro and will also shore up its revenue by $700 million. Wipro’s operating margin was 21% when it made its largest acquisition. Since then, profitability has remained under pressure as the company ended with an operating margin of 15.1% at the end of the September quarter.
MINT PREMIUM See All
This steep decline in profitability over the last two years now limits Wipro from making another large buyout.
All this comes at a time when Delaporte is struggling to build a stable leadership team: four senior executives overseeing business in four countries left last month. Many employees are unhappy as for the first time in its history Wipro did not pay quarterly performance-linked component of salary to a third of its workforce, which comprises the senior management team.
Wipro shares touched a high of ₹721.5 a share on 4 January this year. Since then, it has tumbled 46.1% as against a 3% decline in NSE 50 between 1 January and 13 October. Beyond issues of sputtering growth and falling profitability, investors are disappointed that Wipro has not rewarded them well. Wipro last did a share buyback in October 2020. Mumbai-headquartered TCS returned ₹18,000 crore to shareholders earlier this year when it went for share repurchase while Infosys is expected to announce a buyback today (Thursday).
Delaporte and Wipro will again need to soon win back the trust of the three central constituents of any business: clients, employees and investors.
They are battling against time.
Elsewhere in Mint
In Opinion, Arun Maira argues both physics and economics need a reset. Forget the Bollywoodesque fantasy that India can decouple, says Rahul Jacob. Stuart Trow says a toolkit to fix Bernanke’s fixes may qualify for a future Nobel. Long Story answers questions about toxic cough syrups.
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less