Wipro Q4 in line; Q1FY17 guidance disappointing: Analysts

However, Karan Taurani of Dolat Capital expects Wipro to underperform compared to peers and sees a weak opening for the stock tomorrow.Below is the verbatim transcript of the interview. Kritika: We are still awaiting the exact figures for the dollar revenue growth but on the topline, on the margin, margins are 20.1 percent. Is that in-line with expectations and the topline also seems to have beaten or just come in-line with expectation? Menon: I think the revenue in rupee terms is slightly ahead of what we expected and margin is exactly in-line with what we expected at 20.1 percent. Kritika: At the 20.1 percent band are they in-line with what you had been projecting because they have been trying to scale up margins. What do you think would be the exact impact on this quarter? Menon: I think this is partly due to the one month integration of health plan services which they acquired. So that should be part of the reason why there has been a slight impact on margins. Kritika: What would you comment on the buyback because the buyback is a little over about Rs 2,500 crore. We were awaiting the details of the buyback, how do you expect the street to react to the buyback figures, we are expecting possibly a slightly higher amount as a whole? Menon: I think this is fair. They should have a lot of cash left for acquisitions and I think this is a time when the industry is consolidating so I think it is prudent to keep a lot of cash on hand to make these strategic acquisitions. So, the buyback is a good thing but it is just a signaling mechanism. It is not intended to be a really long-term support for the stock. Reema: Considering that the buyback price – this is a tender buyback at Rs 625. Do you believe the stock should be headed at least to those levels or buyback of just 1.7 percent on the outstanding equity shouldn’t move the needle of the stock too much? Menon: I think it is just a signal. It is a positive signal and we think that the company, once the energy sector turns, it will gain traction. That was something that shaved off quite a bit of their growth over this last year, year and a half. So, once that at least stabilises, we should start seeing Wipro weighing in the active consideration set for people. So, we prefer Wipro ahead of TCS and Tech Mahindra and we have been holding to that stance for some time now, for the last six-eight months at least and we continue to maintain that. Reema: If you could take us through what your Dollar revenue expectation is as well as for the Q1 FY17 guidance? Taurani: So we expect, expected Dollar revenue of USD 1,904 for the Q4 not got the number on hand and for Q1 we expect a guidance of 3.5-5.5 percent. Reema: We have seen the stock run up quite a bit. It has been gaining ground for the last five or six trading sessions. If you compare it to the February lows of Rs 520. It has now seen a rally of 15 percent. What all is priced in into the stock in terms of dollar revenue as well as the guidance? Taurani: Dollar revenue FY17 given the acquisition of HPS which they have done we expect dollar revenue in the range of 10.80-11 percent for FY17. So, that is more or less priced in and on organic basis obviously the growth will be about 7.5-8 percent because the HPS acquisition gives about 3.5 percent kind of an impact on FY17 revenues. Also in terms of margins it is largely priced in because HPS will have a negative impact on the margin range of 50-80 bps going ahead. So, that is also more or less priced in but we don't expect any movement on the upward for the stock from here on because valuations are anyways capped at around 16-16.5 times FY17 and they appear to be fair. So, we have an accumulate rating on the stock and not on the numbers as such largely in terms of dollar revenue or in terms of guidance but yes, we would maintain that basically going ahead. We don't see any scope of earnings upgrade for Wipro from current levels. Kritika: Weren't we expecting a larger dividend of Rs 4,000 crore plus roughly. Would the market be disappointed that the buyback hasn't been larger than - we were expecting Rs 4,000 crore or upwards? Taurani: The buyback is slightly lower than expectations and in terms of dividends also it is a disappointment because you would actually expect a large company like Wipro basically who is sitting on a huge cash to kind of give better kind of dividend and we believe that capital allocation has been a problem for most of the large cap IT companies. Kritika: We have the margin figure of 20.1 percent we don’t have the exact Dollar revenue figure, but Rupee revenue seems to be in line. Is this meeting your expectations? Nangra: Yeah, broadly the numbers seems to be in line with our expectation on profitability and Rupee revenue, broadly in line numbers, so far whatever I have seen is broadly in line with our expectations. Reema: Walk us through your expectations? Nangra: See for the quarter Dollar we are looking at around USD 1,904 and for the next year I guess quarter-on-quarter (Q-o-Q) I am looking at for the first quarter Q-o-Q guidance to come in the range of 4-5 percent, so I guess that should be guidance. Kritika: In terms of margins are you expecting them to have more levers to be able to scale up margins from the 20-21 band? Nangra: In near future because acquisition I doubt whether they have huge levers available, but I guess in the long-term given the way in comparisons to its peers Wipro has lot of levers in the long term to improve the margins situation actually. So that’s one thing if management is more clear the way Infosys have come out of it and taken a stand in terms of improving profitability and volume growth delivering on both fronts if Wipro can also position itself that way it will definitely lead to a good stock returns also.