"Wipro has been trading in the region of 14.5-15 times and we have already seen Infosys de-rate to about 13 times. The numbers so far indicate that the recovery is not in sight. One would expect Wipro to de-rate to similar to what Infosys is trading right now," he said in an interview to CNBC-TV18.
Wipro is facing structural issues like lack of a leadership vertical and lack of a leadership service line, he pointed out.
"We will have to scale down our estimates because we are going into the year assuming that Wipro will be able to recover from sub par growth of around 5-6 percent in FY13 towards around at least 8 percent growth levels. The management guidance of 5 percent is substantially below our expectations," he added.
Below is the edited transcript of his interview to CNBC-TV18.
Q: How are you reading the Q4 numbers and what about the guidance?
A: Clearly, the numbers are on the weaker side. It is hardly 0.3 percent. The guidance is relatively weak. On one hand, we have -0.6 percent to about 1.6 percent. We were expecting a growth of around 2 percent in Q4 and guidance of around 1-3 percent for the first quarter because there is general expectation that growth will be more first half led in FY14.
We are beginning the year with a negative to 1-1.5 percent guidance which indicates that visibility has not improved for this round. It is disappointing especially for the sections of the street and investors who are waiting for a recovery. This derails our expectation quite substantially.
Q: If you consider Q1 guidance to look muted, then the stock should take a beating on Monday. Where do you expect the stock to open on Monday? Do you expect something similar to Infosys or the stock could correct 3 or 4 percent as the stock has already corrected from Rs 400 post demerger?
A: Wipro has disappointed on Q4 from expectations on results point of view and they have disappointed on Q1 guidance. Expectations from Infosys was a lot higher compared to Wipro, so I don't expect similar disappointment in share price that we saw in Infosys in terms of the quantum of the share price movement. I think the stock will move southwards on Monday.
Q: Wipro came out with a dollar revenue growth of about 5 percent for the entire year. Now given that the turnaround for Wipro has taken so long, what would you expect would be the dollar revenue growth in FY14? Would you have to scale down your estimates?
A: We will have to scale down our estimates because we are going into the year assuming that Wipro will be able to recover from sub par growth of around 5-6 percent in FY13 towards around at least 8 percent growth levels. The management guidance of 5 percent is substantially below our expectations.
Both Wipro and Infosys have guided weak numbers for the whole year. So, it not only recovered fully but the market also recovered to the extent that we were expecting the market for IT services. I think expectations across the street for most should moderate on the back of these results.
Q: On the valuation side, what would you expect Wipro earnings per share (EPS) for FY14 to be now as a pure play IT company and thereafter what the fair price to earnings (P/E) valuation should be now?
A: I cannot comment on the pure IT services business or earnings as there were many tax issues present. However, we were expecting Wipro to report an earning of Rs 29 for FY14 clearly with growth moderating compared to our initial expectation. We will probably shave a few percentage points from Rs 29 EPS.
Wipro has been trading in the region of 14.5-15 times and we have already seen Infosys de-rate to about 13 times. The numbers so far indicate that the recovery is not in sight. One would expect Wipro to de-rate to similar to what Infosys is trading right now.
Q: So closer to 13 P/E multiples for FY14?
A: One would expect that.
Q: What do you think would be the main problem with Wipro? Would it still be the issue with smaller clients, would it still be the telecom vertical, what is your estimate in terms of where they would have missed in terms of performance?
A: Wipro is facing structural issues like lack of a leadership vertical, lack of a leadership service line, they do not have a very large vertical or large services where they are the industry leaders which can drive the growth, which can under ride the growth every quarter.
From a tactical perspective especially in the last five to seven quarters, tail end of clients has been the biggest challenge for Wipro where they have been trying to move away from the smaller clients, which has a negative impact every quarter.
So, it has a negative impact in the last several quarters and to counter balance the shortfall every quarter because they are moving away from the smaller clients, Wipro needs to add a lot more growth. So, it could be the fact that they have not been able to add substantial incremental growth to counterbalance that.
Having said that, I think the margins for the quarter have improved compared to our expectation. Wipro is moving many of their projects from time and material (T&M) to fixed-price, which is giving them the margin benefits but the revenue growth is not reflecting that change yet.
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