India’s third largest software services firm, Wipro Ltd, has beaten industry heavyweights Tata Consultancy Services Ltd (TCS) and Infosys Technologies Ltd in terms of revenue growth in the fiscal year ended 31 March. Its revenue grew by 14-15% excluding acquisitions, compared with Infosys’ 12% growth and TCS’ 6%. But the real surprise has been in Wipro’s price realization, with its billing rates improving on a year-on-year basis. By contrast, Infosys and TCS reported that average pricing dropped by between 4% and 5%.
According to Wipro, the improvement in realizations is mainly because of a large shift towards fixed price projects (FPPs). The contribution of FPPs rose by at least 600 basis points last year (one basis point is one-hundredth of a percentage point). The traditional time and material (T&M) type of projects are billed based on resources used, on a cost-plus basis. With FPPs, information technology (IT) companies are able to retain a large part of the efficiencies derived, thereby increasing both revenue and profitability.
Still, it’s unlikely that only the move towards more FPPs would have enabled the company tide over the pricing pressure the whole industry is facing. After all, other IT firms have also been moving work offshore.
One reason for Wipro’s divergent pricing behaviour is that its rates were relatively low to begin with and, hence, there’s less room for falling. The other more worrying reason is that tough renegotiations are yet to happen. If that is correct, it’s likely that the fall in pricing may be seen in the coming quarters.
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For now though, the company is sitting pretty. It finished off the year on a healthy note, with both pricing and margins improving quarter-on-quarter. Besides, the company got back to adding to its employee count in the IT services space after reducing headcount in the first three quarters.
But there are a few negatives as well in the company’s numbers, such as the sharp 12% drop in onsite volumes.
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Wipro’s guidance for the June quarter assumes a lower rate of drop in revenue compared with Infosys. The company has now delivered consistent performance in the last three-four quarters, giving investors added comfort.
The stock, meanwhile, has outperformed its peers in the rally since early March, factoring in, to some extent, its relatively better financial performance in recent times. Wipro trades at about 11 times forward earnings, in line with that of TCS, and lower than the valuation of 14 times enjoyed by Infosys.
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Graphics by Sandeep Bhatnagar / Mint