Information technology (IT) firm Wipro Ltd’s results for the December quarter were above consensus estimates, but its shares still fell by 1.7% on Wednesday. Investors in IT stocks seem to have begun to book profit after the rally since Infosys Technologies Ltd’s results announcement last week. Shares of Tata Consultancy Services Ltd (TCS) and Wipro had risen by as much as 12-13% in less than a week, but have since corrected by around 3%.
Coming back to the results, Wipro has confirmed the strong revival in IT outsourcing. Indeed, even the results of International Business Machines Corp. (IBM) announced on Tuesday reaffirm the trend that there is strong growth in IT outsourcing.
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Wipro’s IT services revenues grew by 5.8% in dollar terms, pretty much in line with the growth reported by the top two IT firms. Growth was all-round, with every industry vertical, services segment and geography growing.
What’s more, Wipro added nearly 5,000 employees, net of attrition, last quarter, after several quarters of little or no growth in its employee base. The strong hiring suggests that the demand environment is expected to remain strong. The company expects revenues of its IT services revenues to grow by 3-5% in the March quarter, which again is an encouraging sign, considering that budgets of many clients for 2010 have still not been finalized.
Unlike TCS and Infosys, Wipro reported flat margins, which resulted in a growth of just 3.4% in earnings before interest and tax for the IT services business in rupee terms. TCS and Infosys grew earnings before interest and tax by 7% and 6.2%, respectively.
But it must be noted here that Infosys’ margins rose largely because of a write-back of provisions for doubtful debts and after-sales client support. Adjusted for this, its margins would have dropped by about 80 basis points. Considering the appreciation in the rupee last quarter, Wipro has done reasonably well to maintain margins. One basis point is one-hundredth of a percentage point.
In fact, the firm has improved margins in its core IT services business by at least 300 basis points in the past one year. Besides, it has a relatively large exposure to emerging markets, especially India, which are growing at rates higher than the industry average. Last quarter, revenues from the India and West Asia region grew in excess of 12% sequentially.
Coupled with the strong hiring and the sanguine revenue guidance, it seems like Wipro is on a strong footing. Its valuations, meanwhile, are at around 10% discount to Infosys and at par with TCS’, based on annualized earnings for the December quarter.
Graphics by Yogesh Kumar/Mint
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