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 Wipro Q2 Preview | Profit likely to fall but revenue may rise 7% on Capco deal & organic business.

October 13, 2021 04:05 PM

 Wipro Q2 Preview Profit likely to fall but revenue may rise 7% on Capco deal & organic business.
IT services provider Wipro share price surged 21 percent since July 2021 and rallied 59 percent in the current financial year.

IT services provider Wipro share price surged 21 percent since July 2021 and rallied 59 percent in the current financial year. It gained 1 percent on October 12, ahead of its earnings, when its peers Infosys, TCS, HCL Technologies and Tech Mahindra traded in the red.

Whether the momentum in the stock price will continue or not, is going to depend upon its quarterly earnings and commentary. The company will announce its September 2021 quarter earnings on October 13. Experts largely hope for 7 percent growth in IT services revenue in constant currency terms led by organic as well as inorganic components.

Topline Expectations

In the inorganic component, Wipro had completed the $1.5 billion acquisition of Capco on April 29, which is expected to boost company’s revenue in Q2FY22.

Also Read : Information technology (IT) stocks rally on Accenture’s FY22 guidance; Infosys, Wipro at new highs

“We expect sequential revenue growth of 7.2 percent in constant currency, which is marginally above the guidance range of 5-7 percent. Revenues include inorganic component of 3 percent, while organic constant currency revenue growth of 4.1 percent will be a multi-year high,” said Kotak Institutional Equities.

The brokerage further said revenue growth will be powered by ramp-up in short cycle deals, contribution from full ramp-up of mega-deal and full quarter contribution from Capco acquisition.

Prabhudas Lilladher expects a strong IT services revenue growth of 7.4 percent in constant currency QoQ, including IT services, organic revenue growth of 4.3 percent in dollar terms and Capco’s contribution of $216 million.

Deal Wins

The quarter has been quiet on deal announcements. So Kotak expects muted value of deal announcements.

Guidance for Q3FY22

Kotak as well as Prabhudas Lilladher expects Wipro to guide for 2-4 percent constant currency revenue growth for December 2021 quarter. “Aided by scaling up Capco business and addition of revenue from Ampion acquisition,” said Prabhudas Lilladher.

Margin Contraction Likely

Wage hike and amortisation charges on consolidation of Capco are expected to have an impact on the EBIT margin that is likely to contract in the quarter ended September 2021, experts feel. The fall could be in the range of 60-100 bps QoQ.

Kotak expects an EBIT margin decline of 60 bps QoQ on account of full-quarter impact of wage revisions at the senior levels, rollout of wage increase for employees in the mid and junior levels effective September 1, impact from full quarter consolidation of Capco, and decline in utilisation rate which at 86.8 percent is unsustainable.

According to Prabhudas Lilladher and ICICI Direct, margin decline could be around 100 bps QoQ and 90 bps respectively during the quarter. As a result, there could be fall in profit for the quarter.

Key things To Watch Out For

Investors are expected to focus on commentary on revenue growth accelerating to levels of larger peers, execution of past large deal, growth in large accounts, commentary of large deal pipeline, levers to defend margins noting sharp 200 bps erosion on YoY comparison, partly influenced by Capco deal, attrition rate of 15.5 percent on trailing twelve months basis is high and will likely increase to 20 percent, and measures to staff projects and handle supply side challenges will be keenly followed, said Kotak and Prabhudas Lilladher.

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