Hinting out at how this earnings season is going to be, Information Technology major, Wipro on Wednesday announced its quarterly results for the January-March quarter of financial year 2019-20. The Bengaluru-based IT company posted a 5.3% reduction in net profit from the previous quarter to Rs 2,330 crore even after a 4.7% revenue growth to Rs 15,710 crore. The reported net profit of Rs 2,326 crore is slightly below street estimates. With uncertainty around when things will return to normal, Wipro has steered clear of any revenue guidance for the first quarter of the new fiscal.
Now the question remains how should investors translate the fall in profits and no new guidance on what is to come in the next quarter, into trading on the stock exchanges. Three brokerage and research firms are not too optimistic about the stock and its performance, with none of them recommending to buy Wipro.
“While the decline in Q4FY20 revenue was minuscule, we anticipate significant impact in H1FY21,” said Edelweiss Securities Limited while putting a ‘hold’ call on the stock and pinning a target price of Rs 214 per share. The brokerage believes that revenue growth will be something that will be hard to come by in the current fiscal year. Wipro is expected to cut spending in the coming quarters, with clients asking for deferrals and discount requests for the current deals. Wipro added 65 new clients in the January-March quarter as compared to 77 clients in the previous quarter.
With 51% of the revenue comparison of sectors such as BFSI, Retail, travel, Manufacturing and energy, HDFC Securities is of the view that Wipro’s growth will continue to fall. Consumer, healthcare and communication segments will ease the pain for the IT major. “New opportunities will emerge with increased cloud adoption, Automation and workplace modernisation. Clients are looking for higher efficiencies (RTB) and vendor consolidation (benefit for incumbents). While growth concerns remain (Covid led disruption), there is limited scope for margin expansion,” said HDFC Securities while advising investors to reduce holding in the stock. A ‘reduce’ rating by HDFC Securities means the brokerage is expecting (-)10% to +5% returns from the scrip.
Wipro announced 1% revenue decline from IT services, while also indicating a $14 million direct impact due to disruption caused by the novel coronavirus pandemic. “ This also affected margins; reported EBIT margin, including FX hedge gains, was down 76bps QoQ to 17.6%, below our/consensus estimates of 18%/18.3%. Reported PAT at INR 23.3bn (-5% QoQ) was c.9% below our estimates,” said JM Financial in a research note. The brokerage stands firm on its previous rating, advising investors to hold their investments in the stock.
HDFC Securities has cut Wirpo’s estimated net revenue for the current fiscal year by 0.5% to Rs 59,600 crore, the company made Rs 61,000 crore in the past 12 months. For Wipro to get back on the growth train, Edelweiss said that the firm needs to bag more large deals. “While the client mining efforts will ensure that Wipro’s revenue growth improves, it needs to win new large clients to catch up on growth with peers. It needs to improve its large deal market share to deliver on its guidance of reporting revenue growth at par with that of peers. As growth bounces back it will lead to a significant margin expansion owing to current lower utilisation levels which will get a kicker as volume growth increases,” it said. Key risks for Wipro include slowdown across major markets such as Europe and the US. The appreciation of rupee against the US Dollar and Euro could also pose a challenge.
On the charts as well Wipro is facing resistance. “The stock faces a strong resistance at the 205 mark. This needs to be conquered and crossed on the back of very good volumes in order for this stock to be in bullish territory. Until then I would not recommend an entry on the buy side. The tendency until then would be a sideways or choppy movement. Due to lack of activity, it would be stuck in a range between 175 and 205. If we close above 205, we could see levels of 220 and 235 soon. However if we break 175 on closing basis, we could retest the previous lows and head to 150,” said Manish Hathiramani, Proprietary trader and Technical Analyst told Financial Express Online.
(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)