Wipro Q1FY23 performance lower than market expectations

Wipro Limited is a leading technology services and consulting firm focused on developing innovative solutions to meet the most complex digital transformation needs of its clients. With more than 240,000 employees and business partners spread over 66 nations, they fulfil their mission to support the success of their clients, co-workers, and communities in a dynamic global environment.

Contrary to the pessimistic tone being struck in the earnings of IT businesses thus far, Wipro Ltd. was bullish about its prospects when it announced its Q1FY23 results on July 20, 2022. It stated that there is no slowdown in spending, all markets are increasing, order bookings are good, and the deal pipeline is robust. Yet, brokerages consider their performance lower than expectations. Wipro share price has increased by almost 1% on stock exchanges as well, with volumes rising by 2.5 times, indicating that investors are feeling bullish about the IT stock. Let’s now investigate the Q1FY23 results of leading IT player Wipro Ltd. in deeper details.

Key Highlights of Wipro’s Q1FY23 performance

• Recorded a 16.5% YoY jump in revenue at Rs 21,529 crore in Q1FY23 from Rs 18467 crores
• In CC (constant currency) terms, Wipro reported a revenue growth of 2.1% QoQ in 1QFY23
• In terms of geographies, America 1 led the growth (+19.6% YoY), followed by America 2 (+17.4% YoY). Europe & APMEA (Asia Pacific, India, Middle East and Africa) continued to record double digit growth (+15.6%/ 1% YoY).
• Reported a fall of 20.60% in its Net Profit at Rs 2,563.6 crore in the Q1FY23, as compared to Rs 3,232 crore
• Attrition remained at elevated levels of 3% in Q1FY23 vs 23.8% in Q4FY22.
• Company bagged 18 large deals of a total value of $1.1 bn
• Order books in TCV (Total contract value) term grew by 32% and in ACV (Average contract value) terms grew 18% YoY, stood at all-time high

Wipro results Q1FY23: Revenue grew 16.5% YoY

Wipro Ltd. recorded a 16.5% YoY jump in revenue at Rs 21,529 crore in Q1FY23 from Rs 18,467 crores in Q1FY22. On a QoQ basis it reported a 3.2% increase in sales from Rs 20,861 crores in Q4FY22 to Rs 21.529 crores in Q1FY23. While in CC terms, Wipro reported a revenue growth of 2.1% QoQ in Q1FY23, supported by growth in consulting and engineering services.

IT Services Segment Revenue was at $2,736 million, an increase of 0.5% QoQ and 13.3% YoY as the demand for Cloud services continues to remain strong. Sequential growth performance was led by consumer (+5% QoQ CC) & BFSI verticals (+2.4% QoQ CC), which grew above the company average, while manufacturing declined sequentially. Digital engineering and application grew faster (+3.5% QoQ) than iCORE (flat QoQ CC).

Moreover, all markets grew double-digit. With the Americas and Europe, as top two markets growing at 18% and 16% YoY for the Q1FY23 in constant currency terms. So, in terms of geographies America 1 led the growth, up 19.6% YoY with all sectors showing strong growth, followed by America 2, up 17.4% YoY. Europe & APMEA continued to record doubledigit growth of 15.6%/ 15.1% YoY respectively. While company said that the region that did particularly well during the quarter were Australia and Southeast Asia.

“Despite the uncertainties of the macroeconomic environment, if I look at our pipeline, our order booking, and the discussion we are having with our customers, there has been no slowdown or pullback of spends for us. The demand for IT services is robust,” CEO Thierry Delaporte said, addressing the press after the company announced its earnings for the Q1FY23.

Wipro results Q1FY23: PAT fell 20.6% YoY despite 16.5% YoY jump in revenue

Wipro Limited reported a fall of 20.60% in its Net Profit at Rs 2,563.6 crore in the Q1FY23, as compared to Rs 3,232 crore in Q1FY22. It also witnessed a downfall of 16% in net profit against the Q4FY22 numbers.

Company stated that the decline in net profit was due to increased investment and elevated employee costs, as well as a higher base in the previous year on account of a one-time settlement. Theclosing strength of employees for was at 258,574, an increase of 15,446 QoQ. LTM (Last twelve months) attrition remained at elevated levels of 23.3% in Q1FY23 vs 23.8% in Q4FY22.

Jatin Dalal, Chief Financial Officer said, “We are consistently investing in solutions and capabilities for our growth to further strengthen our position of being a strategic partner for our clients. At 15% of operating margins, we believe that we have bottomed out.”

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Wipro results: Robust New deal wins and strong order book

“It’s always difficult to predict what’s going to happen in 12 months, but in the next 2.5 months, we have pretty good visibility,” CEO Thierry Delaporte added. He further added “We expect Revenue from our IT Services business to be in the range of $2,817 million to $2,872 million. This translates to a sequential growth of 3.0% to 5.0%.” Company guided QoQ revenue growth of 3-5% in Q2FY23, while growth for FY23 would be in double digits.

The reason for the same was the robust deal wins & strong order book. Company bagged 18 large deals (value- $1.1 bn). Order books in TCV term grew by 32% and in ACV terms grew 18% YoY, stood at all-time high. Further the company is witnessing robust demand from cloud, cyber security, and digitization service space. Wipro Ltd is also seeing healthy growth led by partnership with Microsoft, Google, Service now and SAP.

Wipro won numerous large contracts in Europe, with the order book increasing by 40% YoY. It has one significant deal in the pipeline for Q2FY23. In APMEA, Australia, and Southeast Asia, the order book is up 60% YoY. Wipro has won a multi-year contract with one of Australia’s largest financial services firms to provide application and infrastructure support services. Wipro will support the client’s technology transformation, improve efficiency, and enhance customer experience.

Additionally, they finished the acquisition of Rizing last quarter in keeping with their plan to strengthen its cloud and consulting skills. Rizing is an international SAP consulting company and one of SAP’s top global strategic partners. Rizing will become a crucial addition to Wipro’s Full Stride Cloud Services as well as its SAP Cloud practise.

Technical Analysis of Wipro Share price

Wipro share price has gone down 43% till date in 2022 along with several other IT players in the IT sector. Wipro stock is currently trading close to 52 weeks low of 391. Almost all the IT companies have gone down significantly due to rising attrition rates and several other headwinds looming in the IT sector. NIFTY IT has fallen almost 27% in 2022 till date, while it has gained 1.8% in last 1 month as compared to 7.5% one month increase in NIFTY 50, thus IT sector remained a major underperformer.

Motilal Oswal said, “We maintain our Neutral stance as we await: further evidence of the execution of Wipros refreshed strategy, and a successful turnaround from its growth struggles over the last decade before turning more constructive on the Wipro Stock.”

While HDFC Securities said, “We lower the margin estimates to factor near-term margin headwinds and a protracted recovery which translates to FY23E earnings underperformance and sharp swing in FY24E and thus maintain ‘ADD’ rating on Wipro Stock, with a TP of Rs 475.

Our View

The company’s focus on growth, acquisition to bridge capabilities, wage hike and higher travel cost will dent margins in near term. Further, Wipro sees headwinds in margins and hence expects margins to be below its guided range (17-17.5%) in next 2-3 quarters. It expects to maintain its margins at 17-17.5% post that. Management also stated despite uncertainties of the macroeconomic environment, there has been no slowdown or pullback of spend.

Wipro along with TCS, Infosys and HCL Technologies make the top four IT companies in India. All of them are struggling with rising attrition and to control this, margins are getting impacted with higher employee costs as a strategy of employee retention. On the other side this quarter has witnessed some of these IT majors win the highest value of deals in a quarter. Considering the stock performance, Wipro has been the worst performing among the top four for the last one year period.

While the issues related to the IT industry may be overstated, the winning of deals with higher value this quarter points to the inherent strength of the IT sector. An IT stock like Wipro has fallen from a peak levels over the last few months and there is limited downside from here and in all probability, a rally in IT stocks is on the cards. Investors with a positive long term view on the IT sector might find a suitable entry at these levels.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

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