by Suhani Adilabadkar

Wipro was trading flat before the June quarter results came out, and a better than expected performance took the street by surprise leading to a 17% jump in stock price after the Q1 FY21 numbers were released. June was an operationally strong quarter with the new CEO and MD offering an optimistic outlook.

Wipro is a leading global information technology, consulting and business process services company. The company began its journey as vegetable oil manufacturer, later foraying into manufacturing soaps and other consumer care products. Wipro entered IT hardware industry in 1980s by manufacturing and selling mini computers and in 1990s started providing software services to global clients. Wipro is the fourth largest IT company after HCL Tech in terms of market capitalization and profitability. 

Quick Takes

• Revenue and PAT ended flat with margins expanding 144 bps YoY in June quarter FY21.

• Operating cash flow at 127% of EBITDA and free cash flow at 157% of net income in Q1 FY21.

• Wipro’s dual CEO experiment till 2011 was a failure, and the company fell behind its peers due to lack of policy clarity, supply side constraints, low investments in digital sphere and a seeming lack of aggression.

• Thierry Delaporte (previously with Capgemini) replaced Mr. Abidali Neemuchwala after a four-year stint.

• On the upcoming September quarter, CFO Dalal said, “We will play it by the ear, but we certainly see a greater stability in the current quarter compared to Q1. Second, from an environment standpoint, we certainly believe that we should see an uptick in performance in the BUs that I mentioned, consumer business, tech, communication, health also should hopefully do better because some of the elective surgeries, etc., which got pushed out, probably they will come back”.

June quarter FY21 saw good margins over flat revenues

Wipro reported revenue at Rs. 14923 crore in Q1 FY21, almost flat as June quarter FY20 revenues stood at Rs. 14786 crore. Operating profit stood at Rs. 3188 crore in June quarter FY21 compared to Rs. 2947 crore same period previous year rising 8.2% YoY. Margins reported robust growth at 21.37% expanding 144 bps YoY in June quarter FY21 aided by rupee depreciation and efficient cost control.

Jatin Dalal, CFO, Wipro, said, “We expanded the margins during the quarter despite lower revenues, on the back of solid execution of several operational improvements and rupee depreciation. We also continued to sustain robust cash generation with operating cash flows at 174.9% of net income.” PAT or net profit ended flat, reporting at Rs. 2408 crore in Q1 FY21 while EPS for the quarter was at Rs. 4.20, an increase of 5.7% YoY. 

Wipro – the consistent underperformer in IT

Indian IT industry has weathered the GFC (global financial crisis), trade wars, protectionist government measures in foreign markets and parallelly adapted to advanced digital technologies such as internet of things (IoT), business analytics, cloud, mobility and artificial intelligence.

The company has done reasonably well with TCS, market leader with its sheer size growing its revenue and PAT at a CAGR of 11% and 10%, Infosys with all the upheavals moved at 11% and 6% and HCL Tech expanded, at 14% and 9% respectively since 2015. Wipro on the other hand has been a consistent underperformer, with its revenue growing at a CAGR of 5% and PAT at a lowly 2% over the past 5 years.

Wipro’s dual CEO experiment till 2011 was a failure, and the company fell behind its peers due to lack of policy clarity, supply side constraints, low investments in digital sphere and a seeming lack of aggression.

Though there has been management changes at the top thrice over the past 10 years, Wipro has not been able to accelerate growth, leaving the analyst community unimpressed. Thus, in times of coronavirus disruption, the street expected Wipro to report negative growth due to higher exposure to retail, BFSI and ENU (energy, natural gas and utilities) verticals roughly accounting for more than 50% revenues, lower utilization levels, high pricing pressure, lower discretionary spend and postponement of large deals. 

June quarter a pleasant surprise for analysts

But the June Quarter FY21 came as a pleasant surprise, and though Wipro did not report double-digit profitability like Infy and HCL Tech, the company witnessed a stable growth trajectory in rupee terms with strong operational performance. Both revenue and PAT ended on a flat pitch while operating profit grew in high single digits.

What largely surprised analysts was its strong operational performance amidst Covid-19 environment despite flattish revenue. As per management, there were three main contributors to margin expansion, firstly higher utilization rate, improved offshore rate, higher automation, secondly tight leash on incremental spend and lastly favourable forex movement. Segmental performance was also stable with BFSI (30% revenues) ending flat, communications (5%) moving into negative territory and remaining verticals, Health (13%), consumer business (15%), ENU (13%), Tech (13%), manufacturing (8%) all expanded 4-5% YoY in june quarter FY21.  

With respect to BFSI segment, though positive impact was felt through government stimulus leading to higher loan origination and refinancing, spend tightening by banks and financial institutions led to lower growth. 

Management’s positive outlook will be tested

Speaking with respect to the upcoming september quarter, Mr Dalal said, “We will play it by the ear, but we certainly see a greater stability in the current quarter compared to Q1. Second, from an environment standpoint, we certainly believe that we should see an uptick in performance in the BUs that I mentioned, consumer business, tech, communication, health also should hopefully do better because some of the elective surgeries, etc., which got pushed out, probably they will come back”.

Analysts are ready for a re-rating mainly due to the business' strong operational performance over the past few quarters, strong cash generation, operating cash flow at 127% of EBITDA and free cash flow at 157% of net income, robust order book, healthy deal pipeline and stable performance by health, energy and retail verticals. And of course, a new CEO at helm with a turnaround strategy for Wipro is another positive factor though clarity with respect to policy formulation and its execution remains to be seen in the next 2-3 quarters. The stock is currently near its 52-week high. 

Wipro has been reporting lacklustre growth over the past few years compared to its top tier peer group, mainly due to uninspiring top leadership, lower digital investments and inability to break into large deals.  To accelerate growth and catch up with TCS and Infosys, Wipro has once again changed its top leadership and appointed Thierry Delaporte (previously with Capgemini), replacing Abidali Neemuchwala after a four-year stint. But with the full impact of pricing pressure yet to play out, furthering tightening of IT spends and the already visible second wave of Covid-19, the next few quarters will be a test of the new CEO’s growth plan, and Wipro’s overall resilience.