Wipro Limited (NSE:WIPRO): What Is Driving Margins?

Wipro's stable earnings sentiment has analysts forecasting subtle growth of 5.02% over the next year, but let's stop and think through this expectation. Those invested in the stock should contemplate the factors that are driving this growth, as the return realised by shareholders may look different in the future if underlying assumptions are not realised. To get some insight, I will shine a light on the behaviour of Wipro’s margins so investors can evaluate the revenue and cost drivers behind future earnings projections and understand how they may impact on returns compared to the industry.

See our latest analysis for Wipro

What can we tell from WIPRO's profit margin?

In general, the value that accrues to equity holders is partly reliant on the ability of a company to convert sales revenue in to earnings. Knowing the portion of top line revenue that is turned into net income helps to assess this ability whilst spotting profit drivers, and can be found by calculating WIPRO's profit margin.

There has been a contraction in Wipro's margin over the past five years, due to 9.79% in average revenue growth exceeding a 8.88% average growth in net income, which means that although revenue has increased, a smaller portion falls in to the bottom line. WIPRO's most recent margin of 15.48% appears to follow this trend, which could imply that increasing revenue has driven earnings growth rather than enhanced cost management.

Understanding what could be driving Wipro's future earnings

Forward looking projections suggest margins will transition into expansion, with an expectation of 5.92% in annual revenue growth and 7.83% earnings growth expected annually. This suggests future earnings growth is driven further by enhanced cost efficiency alongside revenue increases, which is enlarging the incremental amount of net income that is retained from the forecasted revenue growth. However, those interested in the company should remember that a expanding margin can hold various implications on the company's performance depending on how it operates, which makes further research very important.

Profit margins are commonly useful when employed as a comparitive measure to judge a business' profit-making ability against its industry. In Wipro’s case, it is expected that profit margins will expand whilst the margins in the IT industry remain stable, whilst at the same time, WIPRO’s forecasted ROE of 16.82% exceeds that of the expected 15.15% ROE of the industry (note that this observation is also influenced by relative debt levels). This suggests that analysts expect Wipro's return per dollar of equity will exceed the industry due to the earnings attributes identified in our margin analysis. But before moving forward, it must be remembered that bottom line earnings and profit margins are susceptible to being manipulated and don't always give the full picture. Thus, it is essential to run your own analysis on Wipro's future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.

Next Steps:

For WIPRO, I've compiled three essential aspects you should further examine:

1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Valuation: What is WIPRO worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether WIPRO is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of WIPRO? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.