Why is Wipro slumping despite beating estimates?

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Indian information technology firm Wipro ( WIT , quote ) reported results overnight. Although the company beat analysts' estimates, the stock traded poorly in Mumbai trading.

[caption id="attachment_57801" align="alignright" width="300" caption="Wipro's campus in Kochin InfoPark, India"] Image courtesy Metroman87: http://commons.wikimedia.org/wiki/File:Wipro_InfoPark_Campus.jpg [/caption]

In its quarterly report, Wipro, India's third largest IT firm, announced that consolidated earnings grew at 6.57% sequentially and 17.85% on year-on-year basis to Rs 17.16 billion.

While these numbers are substantially better than the Rs 16.33 billion that analysts had expected, these numbers in and of themselves do not paint the whole picture.

Shares in the Indian IT outfit dropped substantially in India as the result of sub-par guidance . The company has predicted growth to be over a wide range, from 0.5-3.0%. Growth at the low-end of this range would be rather underwhelming for an emerging market stock.

An analyst at Religare Capital, Rumit Dugar, indicated that Wipro's guidance "suggests that volume outlook is uncertain, and that he sees "limited room for EPS upgrades on the stock."

This unclear guidance could be a result of uncertainty in developed markets, with the outlook from Europe remaining muddled.

Traders were largely in agreement with analyst sentiment; Wipro dropped roughly 8% in Friday trading.

If the developed world were to return to normalized growth over the next few months, it stands to reason that a rising tide will lift all ships. However, were such growth not to materialize, it becomes harder to make a case for going long Wipro here.

With its near-term outlook mediocre, and given that this relatively low-beta stock was up 15% this month before its earnings flop, it's not unreasonable to expect Wipro to enter a new downtrend over the short-term. With a forward price-to-earnings ratio larger than competitor Infosys ( INFY , quote ), which did not drop precipitously after it reported earnings, traders should not be surprised to see Wipro slump over the next few trading sessions.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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