For a second consecutive quarter, Wipro’s revenue and profitability are set to get impacted as some of its clients has filed for bankruptcy.
In a statement to the exchanges, Wipro pointed out that its profitability will be impacted by 65-75 basis points (0.65- 0.75 per cent) as one of its telecom clients is going through insolvency proceedings. While Wipro didn’t name the client, it is assumed that the telecom client is Aircel.
In the December 2017 quarter, Wipro disclosed a similar issue with one of its energy and utilities customers, which had filed for bankruptcy. Wipro did not disclose the name of the client but the energy and utilities vertical contributes 12.4 per cent of its revenue. Its shares fell abut 2 per cent in morning trade as investors were concerned about the company’s profitability, but ended marginally up at ₹285.60.
In the December quarter, Wipro posted an 8.4 per cent decline in net profit on a year-on-year basis due to higher costs and said that it sees certain customer-specific uncertainties in the near future. In the past, Wipro had faced similar headwinds from Nortel and GM, though it has maintained that it has not a significant impact on revenues.
Some analysts in the industry believe that Wipro could face a slightly bigger erosion in profitability than they have accounted for. “We believe that the EBIT margin impact would be 80-90 basis points,” said Urmil Shah, IT Analyst, IDBI Capital.
Declining margins
On the margin front, Wipro’s IT services EBIT margin has been gradually narrowing over the years. For example, the margin was around 23-24 per cent in FY14 and is now hovering around 17 per cent on account of subdued growth.
Wipro has been taking aggressive efforts to keep continuing its cash flow improvement. Recently, the company divested its hosted data centre services business to Ensono, an IT services provider, for $405 million, as it wanted to increase its focus on digital. Wipro got the hosted data centre business as a part of its acquisition of Infocrossing in 2007.
Analysts believe that the sale of the hosted data centre business will impact growth next year. An analyst from a leading brokerage house said that while the software major will retain some of the key parts of the hosted data centre business (it services US medicare and medicaid claims and some ERP implementations), there will be pressure on growth. “We expect mid-single digit growth next year,” said Shah.
Meanwhile, management commentary from Wipro is incrementally turning positive with CEO Abidali Neemuchwala saying that the company will get back on the average industry growth path from 2018-19 on the back of strength in the BFSI segment, improving client metrics and digital capabilities.
Last year, its revenues from the IT services business grew 8.4 per cent over 2016-17. Industry body Nasscom said that India’s software services exports will see a revenue growth of 7-9 per cent in constant currency terms in FY19.