Wipro is now behind HCL in market cap

Bengaluru: Wipro has ceded ground to HCL Technologies as the third biggest IT services exporter in terms of market capitalization, and the chasm between the two is getting bigger. That’s not good news for a company that was part of the troika – alongside TCS and Infosys – that helped make a name for India in the global outsourcing map.

HCL closed the gap with Wipro in the days following the announcement of their third quarter results. HCL grew 3.3% sequentially in constant currency in the quarter, the fastest among its peers. In comparison, Wipro’s growth was the weakest among its peers.Shares of HCL have risen 22.4% since the beginning of the year, while Wipro’s have tanked 11.4% in the same period, showing that investors are unhappy with the Bengaluru-based company’s underperformance.

Wipro still leads HCL in revenue, with the company crossing the $8 billion mark in 2017-18. HCL stood at close to $7 billion for the fiscal ended March 31, 2017. However, if both companies maintain their current growth rates – under 5% for Wipro and about 12% for HCL – the latter will breach Wipro’s annual revenue some time next year. “The last time there was a shake-up of the rankings was in 2012 when then `upstart’ Cognizant sped past Infosys to become the second-largest player in the Indian IT services space,” says Hansa Iyengar of research & consulting firm Ovum.

Wipro has been trailing TCS, Infosys and HCL in terms of growth now for several years. In operating margins, TCS and Infosys, at 24-25%, have been way ahead of Wipro (18%), and even HCL has pulled ahead of it in recent quarters (about 20%). Some of this has been on account of external factors. Wipro has had a relatively high exposure to the energy industry, and this vertical took a hit when oil prices went down in the past few years. And when energy started recovering, its healthcare vertical – again one where it has a relatively high exposure compared to most peers – turned adverse because of the uncertainties around Obamacare.

Despite this, the company appeared to be on a path to recovery, and analysts were optimistic about its initiatives in building its digital capabilities. But on Wednesday, the company announced that two of its clients went bankrupt in the past few months – telecom company Aircel and UK-based construction company Carillion.

The company issued a tepid guidance for the first quarter, and it is near certain that CEO Abidali Neemuchwala’s attempt to bring the company to industry leading growth rates by next year has been derailed.

“This could add to investors’ scepticism given the false starts in the past and restrict Wipro’s participation in the broader sector rally currently underway,” JM Financial wrote in a note.

HCL, on the other hand, has made changes to its strategy that appear to be working very well for it. For several years earlier this decade, its growth came from infrastructure services. But in recent times, it has focused on engineering services, has built IP (intellectual property) partnerships with IBM, and made several significant acquisitions – including most recently of data management firm Actian for $330m in partnership with private equity firm Sumeru. It has invested $1.1 billion in multiple IPs over the last seven quarters. JM Financial believes these IP partnerships may contribute to limited revenue growth, but they could have margins at least twice the current company average.

Iyengar of Ovum says HCL’s engineering services arm has been its major revenue driver, growing at 30-35% year-on-year. Declines in the traditional service lines are also hitting Wipro harder than HCL, she said.