Wipro Q1 preview: IT services dollar revenue may decline, Q2 guidance to be 0.5-2.5%

Software services provider Wipro is likely to report a moderate drop in IT services' dollar revenue for the June quarter, which could be due to divestment of its Workday business, but is expected to be within the company's given guidance range. Consolidated profit during the quarter is also expected to decline sequentially.

The Street generally tracks the company's revenue from IT services instead of its consolidated earnings, which also includes its hardware business.

"We expect constant currency revenue growth of 0.4 percent and cross-currency headwind of 65bps. On a reported basis, revenue growth will be lower due to divestment of Workday business that impacted revenues by $9 million," Kotak said, which expects profit to fall 7.4 percent QoQ.

Prabhudas Lilladher also expects a constant currency revenue growth of 0.4 percent and cross currency headwinds of 60bps. But ICICI Direct said that the company's constant currency revenues on global IT services  could drop 0.1 percent QoQ, mainly led by the completion of some large projects and the slower-than-expected ramp-up in certain projects. "This, coupled with 0.4 percent cross currency headwind, will lead to a 0.5 percent QoQ decline in US dollar revenues of IT services segment," it said.

Wipro's revenue guidance for June 2019 quarter ranged between a revenue decline of 1 percent to a revenue growth of 1 percent.

At the operating level, earnings before interest and tax (EBIT) margin may contract by around 100 bps sequentially over wage hikes, rising visa costs and rupee appreciation.

"EBIT margin will likely decline 121 bps due to wage revision effective June 1, marginal appreciation of rupee against the dollar and weak revenue performance," Kotak said.

On the guidance front, most brokerages expect Wipro to guide for 0.5-2.5 percent QoQ growth in constant currency revenue in Q2 FY20.

"We expect Wipro to guide for revenue growth of 0.5-2.5 percent for September 2019 quarter, an improvement from the expected performance of June 2019 quarter," Kotak said.

Prabhudas Lilladher also agreed with Kotak for guidance while CIMB expects Wipro to guide for constant currency revenue growth in IT services (excluding ISRE) of 1-3 percent QoQ for Q2.

Key things to monitor would be Wipro's order book momentum in Q1 FY20 and beyond; demand outlook, especially from  its energy, BFSI, healthcare, communication, India and digital services segments; large deal pipeline/wins; its outlook on pricing; updates on any client/portfolio specific issues; its sustainability of margins noting the aggressive cost rationalisation; and the performance of its acquired entities.