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Two decades ago, in FY04, Wipro’s IT services and products revenue was twice that of HCLTech, 10 per cent higher than that of Infosys, and 70 per cent of that of TCS.
Fast-forward to today and when you consider FY24 revenues (9M actuals + 4Q estimates), Wipro’s revenue is 63/42/18 per cent lower than that of TCS, Infosys and HCLTech.
Nothing can more clearly explain how much the company has fallen behind in the last two decades as it attempted multiple fixes and strategies since the time its high-profile CEO, Vivek Paul, unexpectedly quit in 2005. While the positive momentum did carry on for a few more years, it did not last too long. That it remains amongst the big four in Indian IT even after being such a laggard over the last two decades is more a reflection of how big and prominent it was in the past.
Turnaround hope fades
Three-four years back, hopes were renewed when the company indicated clear intent to return to its past aggressive approach that made it so pre-eminent. Chairman Rishad Premji stated that one will see a ‘bolder Wipro’ that would not be afraid to upset the apple cart. The appointment of Thierry Delaporte in 2020 and his strategic plan was well-received by the market. It did start off well with Wipro results in FY21 and most of FY22 showing renewed growth comparable with peers, but doubts started creeping in after performance started waning again in FY23 and FY24. The turnaround hopes have now come a full circle with the recent announcement that Delaporte is resigning with immediate effect.
At bl.portfolio, we had recommended a ‘book profit’ on Wipro three years back in our edition dated May 23, 2021, when the stock was trading at 513. At that time, our view was that risk-reward in the stock was completely unfavourable as valuations (premium of 72 per cent to 10-year average then) reflected full confidence in permanent turnaround in Wipro’s prospects, while challenges still remained. Since then, the stock is down by 7 per cent while the Nifty is up by a little over 60 per cent, reflecting significant underperformance by Wipro on an absolute as well as relative basis in the last three years.
What should investors do now amidst management rejig? The stock currently trades at a one-year forward PE of 20 times now, cheaper versus 25 times in May 2021. However, Wipro has yet again become a ‘show me’ story. Risk-reward remains unfavourable even at PE of 20 times, given its last 10 and 5-year net profits CAGR are lacklustre at just 4 and 6 per cent. EPS CAGR, juiced by buybacks, is slightly better at 6 and 7 per cent, but still weak.
While newly appointed CEO, Srinivas Pallia is a Wipro veteran (three decades in the company and multiple leadership roles) and comes with strong credentials, given the last 20 years of underperformance of the company, investors must ideally look forward to proof of turnaround. Thierry Delaoporte’s abrupt exit and past leadership issues at Wipro are validation of the fact that business turnarounds are challenging and investors need to weigh the risk versus reward before placing their bets.
Further, the macro economic backdrop for IT services companies remains hazy, with inflation re-accelerating again in the US and expectations for interest rate cuts for the year getting pared back. This will only make a turnaround even more challenging for Wipro. Given these factors, we maintain a sell recommendation on the stock for now.
Recent performance
In a challenging Q3FY24 for the IT services industry, Wipro continued to underperform. Its Y-o-Y constant currency revenue growth was very weak at -6.9 per cent although marginally better than expectations. Operating margin at 16 per cent was 40 bps ahead of consensus expectations, and operating income was 3 per cent above. Markets overreacted to results by interpreting it as a signal that business trend had bottomed out and the stock moved up by 20 per cent in a four-week period after the results. It has however given up most of the gains since.
Looking into the details, it was clear the results did not give much to be optimistic about and business challenges remain. With the exception of Healthcare vertical, all verticals reported flattish to declining performance Y-o-Y and Q-o-Q. Major vertical BFSI, which accounts for 33 per cent of revenue, was down by 4.9 per cent Y-o-Y.
Some of the optimism in the stock post the results was on expectations that there may be some recovery in BFSI. However, given recent unfavourable inflation data in the US (Wipro derives close to 60 per cent of revenue from North America), higher interest rates and some turbulence for the BFSI sector in North America might continue for some more time. Accenture’s updated FY24 outlook reported in March, which reflected enhanced clarity on CY24 IT budgets of clients, indicated that weakness in IT services may last through CY24.
Further, it is unlikely that Delaporte would have quit if trends had bottomed in 3QFY24, as he would have been best placed to steer through the recovery phase as well and one would not want to rock the boat at such a juncture.
Hence, Wipro will likely go through a reset phase under the new CEO in the midst of an unfavourable macro backdrop. While one can definitely be hopeful of a turnaround, it will be long-drawn; and the stock is unattractive at current levels.
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