In today’s Finshots, we dive into what could be going wrong at the IT giant.
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The Story
Miss on All fronts
Revenue — Miss
EBITDA margins — Miss
PAT — Miss
That’s the first couple of lines from Axis Securities’ recent note on IT giant Wipro. See, research firms make projections of what a company’s sales and profits could look like every quarter. And when the company announces its results, they compare the two. If the company fails to match up to the projections, they call it a ‘Miss’. And Wipro missed big during the July to September quarter.
But it’s not just Axis Securities who is disappointed. Mint says that Azim Premji, who founded Wipro’s IT business, is unhappy with how things are shaping up at the company too.
So what’s going on at Wipro, you ask?
Well, the short answer is that it could be the CEO…
For the longer version, we have to rewind to 2020. Back then, Wipro was having quite a torrid time and had fallen to fourth place in the IT pecking order. Its rival HCL overtook it and something had to be done. So Wipro announced a new CEO — a man named Thierry Delaporte. His idea was: “In my Year One, we’ll accelerate growth; in Year Two, we’ll be at the growth level of our competitors; and in Year Three, we will outdo.”
But how would Wipro achieve that growth?
One idea was acquisitions. For instance, Wipro announced a massive acquisition of a London-based consulting firm called Capco. The deal was worth $1.4 billion and Wipro had never splashed that much money on an acquisition. But it did for a simple reason — financial services contributed to 30% of Wipro’s top line. And Capco excelled in this domain. So by buying a consulting firm, Wipro could tack on extra value-added services to its existing clients. And also get a hold of Capco’s existing clients to sell them IT services.
The other way was to bag high-value deals — the $500 million and above kinds. And this endeavour started well. In December 2020, Wipro signed a $700 million deal with German wholesaler Metro to transform the company’s tech capabilities. Delaporte was so confident that the future was bright that Wipro even created a new role and hired a Chief Growth Officer from Accenture to drive its large deals business.
And at first, things looked good. After all, in the decade before Delaporte, Wipro’s revenue had only grown by $3 billion. But within 3 years under his watch, it had already achieved that figure.
But here’s the thing, Delaporte took the top job at Wipro when the industry was riding the tailwinds of the pandemic. Physical offices had to shut down. And suddenly, companies all over the world realized their shortcomings when it came to digitisation. They outsourced their IT transformation needs and companies like Wipro latched on to the opportunity. Business boomed.
But it didn’t last long. And soon enough, the cracks in Delaporte’s vision emerged.
For starters, remember that $3 billion revenue addition under Delaporte’s watch? Well, nearly a third of that came on the back of Wipro’s acquisition spree. Wipro would buy a company and that firm’s revenues would soon get added to Wipro’s top line too. But to get those revenues, Wipro first had to shell out nearly $2 billion from its own pockets.
Now that doesn’t seem like too much bang for the buck, right? And the strategy of ‘use cash to buy companies’ isn’t sustainable either. Especially if the companies you buy also face a slowdown. Which is what happened at Capco.
The other radical idea that Delaporte had was a complete clean-up of the organization.
For instance, out of 750 top executives at the company, nearly 250 of them were laid off within a year. Delapore wanted new blood that could take the company to the next level. But these replacements came at much higher salaries. Maybe that contributed to Wipro’s profit margins shrinking by 3.5%.
Also, that Chief Growth Officer who had to bag the big deals? Well, in the past 3 years, Wipro didn’t win a single mega-deal. Ouch.
Sure, you could argue that IT firms are facing a tough time. The global environment isn’t great and 70% of business typically comes from the US and Europe. When these markets tighten their purse strings, it hurts Indian IT firms. But the thing is that during this same period, Wipro’s rivals bagged at least 9 deals over $1 billion. So it simply means that Wipro has fared worse. Or to put it bluntly — Wipro failed.
And the end result?
For the first time in its history, Wipro’s revenue in each quarter of a calendar year is expected to decline. Its rivals are still growing.
Now we don’t know how Wipro will drag itself out of this situation. The Chief Growth Officer has already resigned this week. A re-restructuring of some of the functions seems to be underway. And there might even be calls to sack the CEO.
So yeah, we’ll just have to see how Wipro manages to turn things around. And we hope they do.
Until then…
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