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Wages, US buy hurt Wipro margin growth

Wages, US buy hurt Wipro margin growth
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First Published: Sat, Jan 19 2008. 12 32 AM IST

Updated: Sat, Jan 19 2008. 12 32 AM IST
Bangalore: Wipro Ltd, which runs the country’s third largest software services business, said its December quarter net profit rose 11.58% to Rs854 crore, compared with the year-ago period, the slowest quarterly earnings growth for the company in four years—a result of higher wages and increased expenses.
The slower earnings growth came despite a strong expansion in business volumes in a quarter that had Wipro integrating its largest acquisition, Infocrossing Llc., a US firm that manages desktops and communication networks and offers back-office services.
The company saw revenues grow by one-third to Rs5,302 crore on business from customers such as General Motors Corp., in line with estimates of a Mint analyst poll. Wipro’s business from customers in India increased to 25% of its total revenues and those from US customers reduced to 44% of the total in the December quarter.
Bumpy year for Wipro (Graphic)
Less dependence on it (Graphic)
Wipro counts revenues from divisions such as Wipro Infotech that offers software services in India, Asia-Pacific and West Asia; Wipro Consumer Care and Lighting; and Wipro Infrastructure Engineering, the engineering and manufacturing arm, as its local revenues.
Revenues from the US, a market that accounts for two-thirds of India’s software exports for Wipro Technologies, the global software division at the Bangalore firm, has come down by 2 percentage points to 62% in a year, said Azim Premji, its billionaire chairman. “Exposure to the US will be coming down…maybe 2 (percentage points) a year. We continue to see good demand for our services,” Premji added, downplaying fears of a US economic slowdown.
Indian technology service vendors are witnessing robust demand for their services in the US and Europe as global corporations such as General Electric Corp. and British Gas Transco Plc. increasingly outsource technology application development and maintainance work offshore to India.
“Though Wipro, driven by acquisitions, outperformed TCS and Infosys in revenue growth, the Top 2 exporters were better in terms of margin expansion and bottom line growth,” said Harit Shah, equity analyst with Angel Broking Ltd in Mumbai.
Infosys Technologies Ltd, which announced its third quarter results on 11 January, said profit rose by a quarter to Rs1,231 crore on revenues of Rs4,271 crore, compared with the same three-month period. TCS, short for Tata Consultancy Services Ltd, India’s largest software exporter, on Wednesday said profit was up by one-fifth to Rs1,326 on revenues of Rs5,923 crore over the year-ago period. On Thursday, smaller rival HCL Technologies Ltd, posted a 7.9% rise in profit to Rs333 crore on revenues of Rs1,817 crore in the three months to end-December, the second quarter of its financial year.
Wipro had a higher business volume growth of 6.4%, measured by expansion of revenues in the December quarter over the preceding three months, compared with the 5% of TCS and 4.5% at Infosys. On a quarter-on-quarter or sequential basis, Wipro’s profit rose 4% from Rs823.7 crore and sales by 11% from Rs4,784 crore in the September quarter. Wipro’s operating profit margins declined by 2 percentage points to 18% due to the rise of the rupee against the dollar, the currency it bills a majority of its customers in, and the lower profit it earned on Infocrossing, the US firm it acquired in August for $600 million, or Rs2,430 crore then.
Infocrossing had an operating margin of 5% in the December quarter, pulling down operating margins of Wipro Technologies, the global software unit, by 3 percentage points to 21%, against the year-ago period. Wipro Infotech saw a 1 percentage point increase in its margin to 9% on Rs971.6 crore sales.
The third quarter is the weakest period for software service firms as they have less billable days due to the holiday season in the US and Europe.
Global software margins will continue at current levels in the current quarter ending March, Wipro said. “Onsite salary hikes of 2-4% (in the current quarter) will impact margins by 1%. Going forward, we expect to maintain margins in a narrow range (of 21%),” said Suresh Senapaty, chief financial officer of Wipro. Apart from improving utilization (of employees), Wipro will look at better pricing, more work shipped offshore, and reduction of sub-contractors to improve margins.
New customers were signing contracts at 6% average increase in price, but some have signed for as high as 10% over the regular prices, Senapaty said. The Bangalore firm forecast stronger business growth in the quarter ahead to $955 million, or Rs3,755 crore.
“The outlook (for the fourth quarter) seems good as the company has seen a pick-up in business from segments such as telecom and networking,” said R. Ravi, equity analyst with Karvy Broking Ltd in Mumbai. He expects Wipro to post a revenue of $995 million for the March quarter.
Shares of Wipro closed 1.11%, or Rs5.10, lower at Rs455.35 in volatile Friday trade on the Bombay Stock Exchange or BSE, a day that saw the Sensex, the bourse’s benchmark index, shed 3.49%. In early trades on the New York Stock Exchange, Wipro’s depository receipts were trading at $12.49, down by $0.04 each.
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First Published: Sat, Jan 19 2008. 12 32 AM IST
More Topics: Wipro | Q3 results | Net profit | IT Sector | Infosys |