Wipro: Strong deal wins but weak Q1 guidance puzzling, say analysts

Wipro's March quarter results were weak and first quarter guidance muted. This is even as deal wins remained strong, which surprised a few analysts. Wipro's valuation discount to large peers -- 20 per cent discount to Infosys and  40 per cent to TCS, is likely to stay or may be widened, if it continues to disappoint on growth prospects, analysts said.The IT major guided for revenues in the range of $2,753 million to $2,811 million, which translates to sequential guidance of minus 3 per cent to 1 per cent in constant currency (CC) terms.

Emkay Global said despite the strong deal intake over the last few quarters, the March quarter revenue growth guidance missed expectations and the divergence between deal intake and revenue conversion remains puzzling.

Kotak Institutional Equities said large deal wins at $1.1 billion was the only positive in Wipro's Q4 results. It noted that June is seasonally weak quarter for Wipro. Yet the extent of deterioration implied by the guidance means either continuation of misery in macro-impacted verticals or revenue leakage, it said.

"We suspect that it is a mix of both," it said.

ICICI Securities said Wipro continue to sign strong bookings, but revenue conversion is still awaited on account of delayed ramp ups of existing deals as well delayed start for some of the new deal signing.

"It is also reflected in weak Q1 revenue guidance. It is also a reflection of possibly weak numbers from their consulting business ( numbers not disclosed, but mid-teen revenue mix in our view) which are the first one to face issues in a weakening macro situation," it said.

Total bookings for the quarter stood at $4.1 billion, up 29 per cent YoY. Kotak Institutional Equities said the large deal numbers look reasonable at face value, yet a few deals had high tenure. For example, a couple of deals had tenure of 8-10 years.

"Wipro stopped disclosure of the more important ACV number. Further, the timelines for conversion into revenue are uncertain," it said.

The reason for the negative guidance, IDBI Capital said, is the uncertain demand environment and cut in discretionary spends.

"The company would aim to maintain margin at the levels recorded in the past few quarters (14-16 per cent). However, on a longer term basis, management would endeavor to grow margins on the back of uptick in utilisation, flatter pyramid and increased offshoring," it said.

JM Finanial said discretionary spending cuts, higher share of consulting revenues and longer transition time of recent large deals are impacting near-term revenues.

"But it does not take away the large order book Wipro is sitting on, which bodes well for growth once demand turns, it said. The brokerage felt that Wipro is doing better on margin management against peers, albeit at a lower starting point.