Wipro’s attrition eased in Q1, but there are other concerns

Wipro’s attrition eased in Q1, but there are other concerns

Market


Shares of of tier-I IT services firm Wipro Ltd. traded flat in opening deals on Thursday on the National Stock Exchange, following the company’s June quarter earnings (Q1FY23), announced after market hours on Wednesday.

Revenue in constant currency grew 2.1% sequentially in Q1FY23, but was 70 basis points (bps) lower than consensus estimate. One basis point is 0.01%. IT services’ operating margin at 15%, declined 200bps sequentially, missing consensus estimate of 16.5%. Higher sub-contracting costs, lower utilisation and acquisitions were the factors that impacted margins.

In a positive, its deal pipeline was healthy. Wipro closed 18 large deals with a total contract value of over $1.1 billion in Q1FY23. In a post earnings conference call, the management said, that its deal pipeline is at an all-time high and demand environment remains robust.

Unlike many other peers, Wipro’s last twelve months attrition fell 50bps sequentially to 23.3% and the management expects it to stabilise in the coming quarters.

Even so, the stock’s near-term outlook is not very encouraging. Analysts caution that it’s consulting business segment could get impacted by the uncertain global economic scenario, thus hurting revenue growth.

“With continued concerns on the macroeconomic environment, we see Wipro’s Consulting exposure (over 10% of revenue added in the last one year) as a potential risk to both growth and profitability,” said analysts at Motilal Oswal Financial Services Ltd.

While the company is not seeing any impact currently, the impact of a slowdown on client spend on the industry in 2HFY23, which should have a more pronounced drag on its recent acquisitions (Capco and Rizing) in the Consulting space, said the Motilal Oswal report. “This remains the key concern on the stock price,” it added.

Further, the management commentary on near-term margins is muted. Margins would remain under pressure as the company would roll-out annual wage hike in September 2022.

According to analysts at Nirmal Bang Institutional Equities, while 15% is probably the bottom for FY23 (as indicated by Wipro), margin is unlikely to be very different in 2QFY23. The company’s management expects Ebit margin to be 17‐17.5% range in the medium term. The domestic brokerage house is of the view that margin it will improve only gradually and will not hit this band even once in any quarter of FY23. Ebit is short for earnings before interest and tax.

“We suspect that this target may remain elusive even in FY24 despite multiple levers that are at Wipro’s disposal. The margin compression has meant that EPS for FY23 has had to be cut by ~20% over the last six months,” it said in report on 21 July. EPS is short for earnings per share.

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