According to an average estimate of six brokerages, Wipro’s profit after tax for Q3 is expected to grow just 0.4% year-on-year, while revenue is seen rising around 4% from a year ago. Sequentially, growth is expected to remain subdued, reflecting a still cautious client spending environment.
Overall revenue and margins
Brokerages broadly expect Wipro’s IT services revenue to grow between 0.5% and 1.2% quarter-on-quarter in constant currency terms, with part of the growth coming from inorganic contributions. The integration of the Harman acquisition is expected to provide a one-month revenue boost during the quarter, though it is also likely to dilute margins in the near term.HSBC expects organic constant currency growth of about 0.5% quarter-on-quarter, translating into around 1.2% sequential growth in dollar terms. However, it flags a 30 basis point currency headwind and expects margins to remain muted due to furloughs and the impact of the Harman acquisition.
Centrum Broking estimates IT services revenue growth of 1.2% quarter-on-quarter in constant currency, including 0.5% organic growth and 0.7% contribution from Harman. It expects EBIT margin to decline by about 22 basis points sequentially, led by the initial margin impact of ramping up recently signed large deals.
Nomura expects revenue growth of around 0.5% quarter-on-quarter in constant currency, which is near the lower end of Wipro’s guided band. It sees EBIT margins declining modestly by around 20 basis points due to ramp-up costs of large deals, partially offset by currency gains.
Impact of acquisitions and large deals
The contribution from acquisitions remains a key theme this quarter. Nuvama expects IT services revenue growth of about 0.5% quarter-on-quarter in constant currency and 0.3% in dollar terms, aided by a roughly 1% contribution from the Harman integration. Margins, however, are expected to remain flat sequentially due to integration-related costs.
Kotak Equities expects organic revenue growth of around 0.9% quarter-on-quarter in constant currency, supported by the ramp-up of the Phoenix mega deal and one-month consolidation of the DTS acquisition.
While reported EBIT margins are expected to remain flat sequentially, Kotak notes that on an adjusted basis, margins could decline by about 50 basis points due to dilution from acquisitions. It also highlights that Wipro did not implement wage hikes during the quarter, which helped contain some cost pressures.
Guidance and outlook
Guidance for the coming quarter will be a key focus area. Centrum Broking and Nomura both expect Wipro to guide for 0% to 2% revenue growth in constant currency terms for Q4. Nuvama and Kotak Equities are slightly more optimistic, expecting guidance in the range of 1.5% to 3.5% quarter-on-quarter, including a meaningful inorganic contribution from recent acquisitions.
Kotak Equities also expects investor focus on the pace at which large deals’ total contract value translates into actual revenue, especially given expectations of healthy large deal wins of around USD 2 billion during the quarter. It adds that excess cash distribution, including the possibility of a buyback, could also be in focus, given Wipro’s past capital return track record.
What to watch
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Analysts expect management commentary to be crucial, particularly around demand conditions in key verticals such as retail, energy and manufacturing, pricing pressure in large deals, and the outlook for discretionary spending. Nomura highlights that updates on the consulting business, especially in the BFSI vertical, client-specific issues, and the large deal pipeline will be closely tracked.
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