The March quarter results of Wipro Ltd were unexciting, with the organic global IT services business reporting a profit growth of just 2% sequentially.
Wipro’s year-on-year growth rates have been dismal through the last fiscal year and the trend continued in the March quarter. Profit of the organic global IT services business grew by just 6.5% in the March quarter on a year-on-year basis, down from 8.2% in the first three quarters. All of Wipro’s peers in large-cap space have grown profit in double-digits in the first three quarters. Infosys Technologies Ltd, the only other large company to report full year numbers, saw operating profit increase by nearly 20% in FY08.
Wipro’s volume growth has been decent — in fact, at about 29% in the last two quarters, the company’s year-on-year growth has been superior to that of Infosys (about 25-26%).
Where it has fallen short is in price realizations. Last quarter, its offshore price realization rose by 1.5% year-on-year and its onsite price realization was up 0.75%. In comparison, Infosys has improved realizations by about 5.5% on both offshore and onsite locations.
Wipro’s inability to drive growth in pricing has disappointed analysts. New client additions fell to 29 customers, the lowest in at least the last eight quarters.
What’s worrying is that the company linked this to the slowdown in the US on a conference call with analysts.
Yet, the company’s outlook for the June quarter is likely to be taken positively by the markets — it expects revenues to grow by 3% sequentially and by 29% year-on-year. Infosys said earlier in the week that it expects revenues to be flat in the June quarter, implying a year-on-year growth of 23%.
Both companies said that growth is likely to be back-ended, or in other words growth should pick up in the second half of the year. Based on these statements one could be excused for assuming that Wipro’s revenue growth in FY09 could top that of Infosys.
The biggest positive surprise in Wipro’s results, however, was not related to the core IT business. Its consumer care and lighting business grew revenues by 10% sequentially and profit by as much as 20%, compared with the December quarter. For the year as a whole, the segment grew profit by 89%, buoyed by the acquisition of Singapore-based fast moving consumer goods company Unza. The Indian IT services and products business also grew profit by a robust 46%.
These two segments helped the company grow profit by 16%, even though the core global IT business managed a growth of just 9%. Note that the global IT business accounted for 88.6% of total profit last year, indicating the extent of the growth by other smaller divisions.
Nevertheless, the performance of its core IT business needs to pick up to justify current valuations of 20 times trailing earnings.
The impact of the CRR hike
The hike in the cash reserve ratio (CRR) by the Reserve Bank of India (RBI) comes at the beginning of what is traditionally known as the slack season in banking, when credit growth is usually negative and liquidity strong.
Consider what happened last year: CRR was raised by 25 basis points each on 14 April and 28 April, but abundant liquidity, seen from the fact that the credit-deposit (C-D) ratio of banks came down from 74.13 on 30 March 2007 to 72.62 on 11 May, cushioned the impact. This time around, liquidity is even better, because the C-D ratio was a lower 73.57 at March-end, while demand for credit is much less. The CRR hike alone, therefore, should not have much of an effect on interest rates.
Banks’ profitability, however, will be hurt on account of the impounding of resources. But, with everybody expecting RBI to hike CRR, most of the impact on banks should already have been discounted, although there could well be a further knee-jerk reaction to the news. Ever since the inflation outlook started getting worse, the Bombay Stock Exchange’s Bankex has underperformed the Sensex — while the Sensex is down only 4.3% since the beginning of March, the Bankex is lower by 16.2%.
It’s interesting to note that last year RBI had announced a similar 50 basis points CRR hike on 30 March, while also increasing the repo rate by 25 basis points. At that time, WPI inflation was 6.5%, while non-food credit growth was 29.5%. At present, WPI inflation is 7.14%, while non-food credit growth is much lower at 22.3%. The big difference, of course, is that the economy is growing much more slowly now.
Note, however, that money supply growth (M3) is 20.7% now and it was also 20.7% on 30 March 2007. In other words, although the economy has slowed down, money supply growth has not, primarily because RBI bought dollars hand over fist to prevent the rupee from appreciating. That’s why the central bank has to tighten monetary policy now.
The irony is, as HSBC Bank’s Robert Prior-Wandesforde, points out, “Even if it were to have an impact on inflation, then the effect probably wouldn’t be seen for a couple of years, given the time it takes for monetary changes to influence growth and then inflation. Ironically, by the time it comes through, there is good chance WPI inflation will actually be a lot lower than it is now.”
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