Wipro Q4: Buyback pill not a panacea for weak fundamental health

Wipro’s poor results weren’t surprising Given the warning results of peers. With revenue down 1 percent versus consensus forecasts and generally included operating income, the stock has priced in results.

However, the outlook was weaker than expected with the company guiding sequential constant currency revenue growth for the first quarter of fiscal 2014 of -3 to -1 percent; That is, the company expects Creative Commons revenue to decline sequentially with the previous quarter, which is not a good sign.

Compare this to last year’s forecast for Q1 FY ’23. The company was guided by 1-3 percent growth in CC revenue. With that kind of a start, the company finished the full year with CC revenue growth of 11.5 percent.

With a much weaker start, full-year revenue performance is likely to be uninspiring and consensus estimates are likely to be revised downward.

Even average number growth could be out of reach for the rest of the year, unless there is a significant acceleration in subsequent quarters, which is less likely given the current global environment. With margins likely to be flat from fourth-quarter levels, earnings growth is also likely to be subdued.

With the stock trading 18 times lagging PE amid expectations of weak earnings growth, long-term investors could avoid the stock for now.

While on the earnings conference call, management emphasized good bookings and winning deals, ultimately what matters to investors is how these translate into revenue and earnings.

At the moment, the rate of this transfer is slow. Management also acknowledged weakness in BFSI’s customer discretionary spending (35 percent of revenue) and technology (11 percent) verticals.

Anatomy of a buyback

There are two ways to look at a Wipro buyback. With close to 5 percent of the paid up capital, it is likely the first meaningful buyout in the Indian IT sector, since the Infosys buyback in FY 2018 (when Nandan Nilekani took over as Chairman). To this extent, this buyback is more visible than the rest.

However, while this may be a positive for short-term traders as SEBI rules allow a portion of the buyback to be reserved exclusively for small investors (holdings under $2 lakh), it may not move the needle for a long-term investor. The company gives up an asset (cash) to buy back the shares.

Unless the stock is earning (dividend yield; 1/PE) higher than the cash yield (interest rates), the buyback doesn’t add much to the underlying value of the stock. At current levels, the dividend yield is 5.5 percent and current interest rates easily match that. So, to that extent, whether that money is returned as dividends or buybacks to investors makes no difference.

Thus, there is not much to get excited about, unless you are a short-term trader and take advantage of the arbitrage opportunities allowed by the current rules. The arbitrage opportunity will depend on the number of investors bidding for the shares.