Wipro CEO Neemuchwala's 2020 Goal Termed 'Ambitious', Shares Fall 7%

Wipro shares sank on Thursday after a string of brokerage downgrades, following fourth quarter earnings announcement on Wednesday. India's third largest IT services company extended its long streak of underperformance because of the slowdown in the energy sector, where it is a major player. Investors, who hoped for a quick rebound under new Wipro CEO Abidali Neemuchwala, had to contend with another quarter of sluggish growth and falling margins.

Here are five key concern areas for Wipro:

1) In constant currency (CC) terms, Wipro's revenue grew by 2.7 per cent sequentially in Q4. On the face of it, the number looks robust, considering TCS and Infosys grew by 2.1 per cent and 1.9 per cent in Q4. But, Wipro's Q4 revenue was boosted by its recent acquisitions. The company's organic revenue (without accounting for revenues of recent acquisitions) grew by just 0.5 per cent in Q4. In 2015-16 too, Wipro lagged behind its rivals with a CC revenue growth of 7.6 per cent. TCS posted revenue growth of 11.9 per cent, while Infosys grew by 13.3 per cent in FY16.

2) Wipro's operating or EBIT margin contracted by 10 basis points to 20.1 per cent in Q4, the fourth successive quarterly contraction. Analysts expect Wipro's margin in FY17 to be lower than the previous year. "Acquisitions, higher wage revision and softer growth will also pull down EBIT margin to 19.8 per cent in FY17, a year-on-year decline of 70 basis points," said Kawaljeet Saluja of Kotak Institutional Equities.

3) For the June quarter, Wipro expects IT services revenue to grow by 1-3 per cent in CC terms. But organic growth will be in -1 per cent to 1 per cent range, which indicates that industry-lagging performance may continue in current fiscal.

4) Wipro has failed to get more business from its big accounts over the past 2-3 years, which has weighed on the company's revenue growth. According to Kotak, Wipro's revenue from top client, top 5 clients and top 10 clients declined by 14 per cent, 6.8 per cent and 5.5 per cent respectively in FY16. "Despite multiple initiatives to spur growth and increase wallet, Wipro has struggled to progress. This reflects in barely any change in $100 million and $75 million accounts since September 2012," the brokerage said.

5) Mr Neemuchwala, who took over the reins of Wipro in February, detailed a six-pronged strategy to double revenue to $15 billion (at 23 per cent margin) by fiscal 2020. Kotak's Mr Saluja said the new strategy is not unique to Wipro, though he added that there is "scope for change under the new CEO."

Rumit Dugar of Religare however termed Wipro's 2020 goal as "very ambitious".

Manik Taneja of Emkay Global said, "Certain sections of the Street have been excited about the possibility of revival in Wipro's fortunes since the new CEO takeover along with the associated news flow around aggressive revenue growth targets and are sure to be disappointed by the March quarter show."

Most analysts however do not see huge downside in Wipro shares because of the Rs 2,500-crore buyback announcement. Kotak praised Wipro's cash distribution structure, saying it is "template for other Indian IT to follow".

"Wipro has announced smart and tax-efficient process of returning cash to shareholders through buyback... Wipro has announced buyback of 40 million equity shares (1.62 per cent of equity) at a price of Rs 625 per share entailing outflow of Rs 2,500 crore," Kotak's Mr Saluja said.

Wipro shares closed 7 per cent lower at Rs 558.85, underperforming the broader Nifty, which ended flat.