Bangalore: Wipro Ltd’s results for the three months ended September reinforce a trend seen in the results of its two larger peers, Infosys Technologies Ltd and Tata Consultancy Services Ltd (TCS)—the move to delink revenue growth from an increase in workforce.
Wipro, India’s third largest software services company, reported on Tuesday that its revenue for the quarter ended September rose 6% over the year-ago quarter to Rs6,917 crore. It said its net profit rose 19% to Rs1,162 crore.
Like Infosys and TCS, Wipro appears to have focused on reducing costs as a way to combat slowing business from the US, the largest market for Indian IT services companies that is just beginning to come out of a recession.
But it also, like the other two, appears to have focused on the so-called non-linear model where growth in business isn’t linked to a growth in workers. Wipro increased revenue from fixed-price projects to 40.3% in the second quarter, from 31.6% a year before, using technology and improved productivity.
Traditionally, Indian IT services firms have focused on time and material contracts, that allows them to bill customers based on the number of people working on projects. But as customers increased pressure on improved productivity, firms such as Wipro have begun moving to the non-linear model—fixed-price projects.
TCS, India’s largest IT services company, saw 47.2% of its second quarter revenue coming from fixed-price projects. In the same period last year, it earned 43.4% of its revenue from such projects.
Infosys earned 38% of its second quarter revenues from fixed-price contracts, up from 33.3% a year ago.
The large firms have been working on moving business to the non-linear model for some time, said Dipen Shah, IT analyst at Kotak Securities Ltd. “The slowdown accelerated it and they have been able to drive this effectively.”
As business from the US recovers—among the three firms, Wipro struck the most optimistic note in forecasting higher growth in the year ahead—IT services firms will increasingly look to work on fixed-price contracts.
“There is substantial traction (for this model) in the last one-and-a-half years. We want to increase the non-linear business substantially. The tools are there and we have been able to execute it effectively,” said Suresh Vaswani, joint chief executive at Wipro.
While TCS and Infosys have been cautious about the business environment, expecting a recovery by next year, Wipro has aggressively forecast that its global IT revenues would increase by 2.5-4.5% on a quarterly sequential basis signalling that a spending recovery could be on the cards. It won 37 new customers in the three months ended September and expects to add more in the third quarter.
“The second half is stronger than the first half. It is almost like returning to the original growth rates,” said Suresh Senapaty, chief financial officer at Wipro.
Azim Premji, chairman of Wipro, who spent the past two months travelling and meeting executives of Fortune 1000 companies in the US and Europe, said he found customers who had slashed budgets, ready to spend on technology. “As I talk to the CEOs across the globe, the general sentiment is more upbeat than before,” he told reporters after announcing the better-than-expected results.
“Our pipeline is the highest that we have seen and order book is strong. We continue our momentum of winning larger, more complex, end-to-end integrated deals,” Premji added.
Wipro’s increase in profits came on the back of large deals signed by customers such as Australian beer maker Fosters Group Ltd and British oil major BP Plc. The numbers beat its own guidance and street estimates.
Wipro’s operating margins, calculated by sales less expenditure, improved 1.43 percentage points to 23.8% due to improved pricing for its contracts.
“They have a better diversified portfolio. Looking at the kind of opportunities they are seeing, it looks very positive,” said Shashi Bhushan, IT analyst at Prabhudas Lilladher Pvt. Ltd, an Mumbai brokerage, who has a upgrade for the Wipro stock to “accumulate” at Rs680 per share.
Wipro has forecast global IT services revenue to grow 2.5% to 4.5% in the third quarter to December, in the range of $1.09-1.1 billion (Rs5,101-5,148 crore). The IT service business contributes 72% of its revenue and 91% of profit before tax.
Infosys, the first large IT firm to report second quarter results on 9 October, said profit rose 7.5% to Rs1,540 crore on sales of Rs5,585 crore. TCS, India’s largest IT services company, reported a 29.2% gain in profit to Rs1,642 crore on a revenue of Rs7,435 crore.