Wipro’s weak results were not surprising given the forewarning from peer results. With a 1 per cent revenue miss versus consensus expectations and generally inline operating income, the stock had priced in the results.
However, the outlook was weaker than expected with the company guiding for Q1 FY24 sequential constant currency (CC) revenue growth of -3 to -1 per cent; that is the company is expecting its CC revenue to decline sequentially and that is not a good sign.
Compare this with last year’s outlook for Q1 FY23. The company had guided for a growth of 1-3 per cent in CC revenue. With that kind of a start, the company closed the full year with CC revenue growth of 11.5 per cent.
With a much weaker start, revenue performance for the full year is likely to be uninspiring and consensus estimates will likely be revised down.
Even a mid-single digit growth might be unattainable for rest of the year, unless there is a significant acceleration in subsequent quarters, which is less probable given the current global environment. With margins likely to be flattish from Q4 levels, earnings growth is also likely to be weak.
With the stock trading at 18 times trailing PE amid weak earnings growth prospects, long term investors can avoid the stock for now.
While in the earnings conference call the management stressed on good bookings and deal wins, ultimately what matters for investors is how these get translated into revenue and profits.
For now, the rate of this transfer is slow. The management also acknowledged weakness in discretionary customer spending BFSI (35 per cent of revenue) and technology (11 per cent) verticals.
Dissecting the buyback
There are two ways to look at the Wipro buyback. At close to 5 per cent of paid up capital, it probably is the first meaningful buyback in the Indian IT sector, since the Infosys buyback in FY18 (when Nandan Nilekani took over as the chairman). To that extent, this buyback is more notable than the rest.
However, while this might be a positive for short-term traders as SEBI rules allow portion of the buyback to be reserved exclusively for small investors (holdings below ₹2 lakh), it may not move the needle for a long-term investor. The company is giving up an asset (cash) to buy back the stock.
Unless the stock is yielding (earnings yield; 1/PE) higher than the cash yield (interest rates), the buyback does not add much of fundamental value to the stock. At current levels, the stock’s earnings yield is 5.5 per cent and current interest rates easily match that. So to that extent, whether this money was returned as dividend or buyback to investors makes no difference.
Thus, there is not much to get excited about, except if you are a short-term trader and capitalise on the arbitrage opportunities that current rules allow. The arbitrage opportunity will depend on how many investors tender the shares.