Although Wipro Ltd’s earnings for the June quarter lacked the many positive surprises contained in the results of Tata Consultancy Service Ltd (TCS), they are a decent set of results considering the prevailing difficult circumstances. The company’s information technology (IT) services business reported a 1.5% drop in volumes and a 2.4% drop in offshore pricing in constant currency terms. The volume decline is slightly worse than Infosys Technologies Ltd’s drop of 1%, and much worse compared to the growth of 3.6% reported by TCS.
Its peers were better off in terms of pricing as well, with Infosys reporting a 1% drop in pricing and TCS’ average price realization falling by a mere 0.25%.
Still, analysts aren’t particularly perturbed since the company met its revenue guidance in constant currency terms. Besides, the subdued performance on the revenue front was more than offset by a stellar performance in cost containment. Wipro’s operating margin rose by 60 basis points last quarter, more or less in line with that for Infosys but lower than TCS, which reported a 113 basis points improvement in margin.
The Wipro has improved its margin at least 140 basis points in the March quarter compared with the December quarter. Ahmed Raza Khan / Mint
It must be noted here that Wipro has improved its margin at least 140 basis points in the March quarter compared with the December quarter, at a time when Infosys and TCS reported a drop in margin of 150 basis points and 55 basis points, respectively. One basis point is one-hundredth of a percentage point.
The fact that the company has sustained margin improvement despite a drop in billing rates and notwithstanding the relatively high base of the March quarter is commendable.
Like at its peers, some of the productivity gains came from shifting work offshore. But beyond that, Wipro has been much more cost-conscious. Its employee base, for instance, has been practically flat over the past four quarters (rising by 3%), while that of its peers has risen by about 10%. This has helped at a time when volumes have been flat on a year-on-year basis.
But there are obvious limits on margin improvement and unless volumes pick up substantially, there is no reason to believe that Wipro’s growth in the medium-term would be materially different from that of its peers. Interestingly, though, Wipro’s shares have outperformed both Infosys and TCS shares by a fair margin since early March. They have risen by 125%, compared with TCS’s 109% rise and Infosys’ 62% gain. But this could well be a technical rise, since the company’s valuations had dropped considerably compared with its peers. Wipro’s shares have traditionally traded at a premium to those of Infosys, primarily because of a low free float. In early March, their valuations had fallen so low that they represented a 35% discount to those of Infosys. Even after the spectacular rise in the past few months, the company’s valuations are still about 14% lower compared with Infosys. There may still be room for upside thanks to the valuation differential.
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