Wipro faces slow recovery as revenue and deal wins lag peers

Wipro's September quarter performance was subdued on both financial and new-deal fronts.

The dollar-denominated revenue of the country's fourth-largest software exporter shrank for the second consecutive quarter while the total contract value (TCV) of new deals fell significantly quarter-on-quarter. In comparison, its larger peers Tata Consultancy Services (TCS) and HCL Technologies (HCLTech) reported sequential revenue growth of 0.2% and 2%, respectively, and showed sustained traction in order flows.

Wipro expects deal momentum to pick up in the December quarter along with a gradual improvement in operating margin. While that augurs well for the medium term, the stock may remain range-bound in the short term given the slow pace of top-line improvement.

The management said at a media conference call that it did not notice any material change in the demand situation from the previous quarter, as reflected in its third-quarter guidance. It expects constant currency (CC) revenue for the December quarter to either fall by 1.5% or grow by a marginal 0.5% sequentially, a range similar to its guidance for the September quarter.

While the company's revenue continues to languish compared with that of its peers, the extent of the decline has been gradually narrowing. This is visible from the trend in incremental trailing 12-month (TTM) revenue. After turning positive in the June quarter at $32 million for the first time in 11 quarters, it further improved to $95 million in the three months to September. However, it remained tepid compared with the $505 million and $628.9 million reported by TCS and HCLTech. This reflects the degree of improvement needed for Wipro to post meaningful revenue growth. The company's TCV for new deals fell 23% sequentially to $2.6 billion in the September quarter due to delays in closing some deals. It expects these deals to close in the December quarter.

The operating margin improved by 50 basis points sequentially to 16.5% after hitting a multi-quarter low of 16% in the June quarter. Better operating efficiency, favourable rupee movement, and the absence of salary increments were the major factors supporting the margin. The company expects to improve margins further in the coming quarters, aiming to reach its target band of 17-17.5% over the medium term.

Wipro's stock has remained range-bound over the past three months since it declared the previous quarter's results on July 16. The stock trades at a multi-year low trailing price-earnings multiple of 13. Investors may have to wait a little longer for an improvement in valuation, given the slow pace of recovery in business momentum.