Wipro reserves Q1 earnings guidance on concerns of Covid-19 impact

Wipro reserves Q1 earnings guidance on concerns of Covid-19 impact
Photo Credit: Reuters
15 Apr, 2020

In a rare move, Bengaluru headquartered Wipro has reserved its quarterly earnings guidance for the first quarter of the current financial year in the wake of the ongoing global Covid-19 pandemic. The country’s fourth largest information technology (IT) services company by revenues closed the final quarter of the financial year 2019-2020 with 4.7% year-on-year growth in gross revenues. 

Gross revenues for the quarter ended March stood at $2.1 billion. The Azim Premji owned company reported revenues for its IT services segment at $8.3 billion for the full financial year ended March 2020, a 1.7% growth year-on-year. It also reported an 8% year-on-year growth in net income for the year, which stood at $1.3 billion.

“The quarters ahead seem challenging and require a tremendous response on costs. We also anticipate our working capital to increase, but our strong balance sheet provides us with the confidence that we will emerge stronger and better. Further, due to the volatility in the external environment, we have decided not to provide quarterly guidance on revenues," said Jatin Dalal, Wipro CFO.

Dalal added that this was the first time the company has not issued earnings guidance since listing on NYSE in the year 2000. 

“We anticipate that we will resume providing revenue guidance when we have increased certainty of both demand and supply side factors. But we don’t know how deep and how long the crisis will be. A two-week disruption in business continuity had a 0.7% impact on revenue, so if we extrapolate that to a couple of months, that is the magnitude of fluidity we face now,” he said.

The company estimated that the IT services revenues for the quarter ended March 31, 2020, were negatively impacted by Covid-19 by approximately $14-$16 million (0.7%-0.8% of revenues) due to the disruption in business continuity.

Brokerage firm HDFC Securities has extrapolated a similar revenue run-rate and has projected a 3-4% quarter-on-quarter fall in the company’s first quarter revenues.

As expected, the fourth quarter earnings have not been impacted much by the pandemic since most the major markets for IT services firms went into lockdown during the second half of March.

Amit Chandra, an analyst with HDFC Securities, said that growth in the company’s digital business -- comprising 41.2% of revenue -- slowing down at 18.3% year-on-year as compared with 34.5% in the fourth quarter of previous fiscal is worrying since the legacy business continues to be under stress with a 9.9% year-on-year decline.

Wipro reported a marginal quarter-on-quarter revenue decline of 1% for the March quarter in its IT services segment at $2.07 billion.

Wipro CEO Abidali Neemuchwala, who resigned early this year citing personal reasons, said that the company was seeing huge pressure on margins but has not seen any deal cancellations in March.

Indian IT services firms have benefitted from the sharp drop in the value of the rupee vis-a-vis the dollar during the last six months, giving them relief in terms of protecting margins even as the economic situation got increasingly worse.

“We are seeing budget cuts, discretionary spending is cut too and the contracts are being renegotiated. Defending revenue is the most important factor for us. While managing variable costs, the working capital requirements will go up,” Neemuchwala said, adding that the auto, travel and hospitality sectors have seen the worst impact while the banking and communication verticals were doing fine.

The company has instituted three task forces to look at the impact of the prevailing crisis on market share, business continuity and human resources. 

Wipro said that it has enabled work from home for 93% of its IT services billable employees that were approved by customers with most clients becoming  comfortable with the new paradigm.

CFO Dalal said that with around $3.4 billion in cash and cash equivalents at the end of the last fiscal, the company is looking at better-priced merger and acquisition targets as the company was generating more than a billion dollars in net income every year, helping it to meet any working capital requirements arising out of the crisis.

Meanwhile, Wipro said that it was deferring the hikes and promotions for a majority of its staff. The company added that it would honour all the campus placement offers it has made during the last year though it was deferring onboarding them.

Last week, Cognizant withdrew its earnings guidance for 2020 on account of the unpredictable and unprecedented business environment it anticipates this year due to the pandemic.

As the Covid-19 crisis deepens, the IT services sector is preparing for a bleak FY21 earnings even as the companies refrain from providing any guidance.