Wipro: large valuation gap

Wipro: large valuation gap
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First Published: Sat, Jan 19 2008. 12 48 AM IST
Updated: Sat, Jan 19 2008. 12 48 AM IST
The correction in information technology (IT) stocks since last March has had an interesting fallout. Wipro Ltd, the third largest IT firm in revenues, has overtaken its larger peers Tata Consultancy Services Ltd (TCS) and Infosys Technologies Ltd in terms of price-earnings valuation multiples. At current levels, it enjoys a premium of 12.6% and 10% over the two companies, based on trailing 12-month earnings.
This is surprising because Wipro’s performance continues to lag that of its larger peers. In the nine months until December, the company’s organic global IT services business has grown by 18.6%, but profit from the division rose just 8.2%. TCS, the best of the lot this fiscal, managed a 23.7% increase in revenues and an 18.4% rise in operating profit. Infosys’ revenues increased by a little more than 20% and profit by 17.5%. Wipro’s profit growth is less than half that of its peers. Its growth fell short even in the preceding two financial years. In fact, for this reason, it traded at a discount of about 6% in March.
The only reason Wipro now trades at a premium is the advantage its shares have always had of low floating stock. Because of the low float, Wipro shares don’t fall as much in a correction. Since last March, its shares have corrected by about 24%, while TCS and Infosys have fallen by 31%. This, coupled with the lower rate of earnings growth, has led to its higher valuations.
As far as the company’s December quarter results are concerned, they were a tad better than its peers, but only just. Its sequential volume growth of 6.4% was higher for instance, but then profit growth in the organic business was lower. Some analysts are also concerned about the reported margin of about 5% for the acquired company, Infocrossing Inc. At the time of the acquisition, they had factored in low double-digit margins based on the company’s Securities and Exchange Commission filings. According to the company, there is no material change in Infocrossing’s profitability from the time of acquisition, although it would aim to increase it to double-digit levels after the initial period of integration.
On the whole, the results were a disappointment, with growth slowing down on a year-over-year basis. Wipro shares dropped 1.8% on Friday, but they need to correct more—not only to bridge the large valuation gap with its peers, but also to reflect worsening fundamentals for the sector. Read on…
Bernanke on software
In his testimony before the US House of Representatives, Federal Reserve chairperson Ben Bernanke specifically mentioned US business spending on software, a matter of vital importance to the Indian IT sector. Here’s what he said: “In the business sector, investment in equipment and software appears to have been sluggish in the fourth quarter, while non-residential construction grew briskly. In light of the softening in economic activity and the adverse developments in credit markets, growth in both types of investment spending seems likely to slow in coming months.”
So apart from the problems arising as a result of the sharp squeeze on the profitability of US banks, which in turn could impact their IT budgets, Bernanke is now warning about a general slow down in spending on “equipment and software.” Not a rosy outlook for the IT sector.
HDFC’s performance
Housing Development and Finance Corp. Ltd (HDFC) profit before tax and exceptional items for the December quarter was 70.9% higher than in the year-ago period, much higher than the 23.9% rise in profit before tax and exceptionals during the September quarter. Profit before tax and exceptionals was Rs760.24 crore during the December quarter, compared with Rs582.44 crore during the September quarter. The main reason for the much better performance lies in profits made on sale of investments during the quarter, although higher net interest income too played a significant part. The December quarter also saw a substantial amount of surplus from deployment in cash in mutual funds.
The loan portfolio was up 25%, compared with the year-ago period at the end of December—slightly higher than the 24% rise at the end of September. Loan approvals for the nine-month period ended December were 30% higher than in the year-ago period, while disbursements rose 28%.
Come rain or shine, that’s been roughly the rate at which HDFC chooses to grow its loans every quarter and the consistency has been a great source of comfort to investors. Non-performing assets (NPAs) remain controlled. NPAs on a 90-day basis are down to 1.12%, from 1.16% at September-end. But there’s one trend that needs careful monitoring: loans to individuals account for 66.6% of total loans, compared with 69.5% a year ago. A higher proportion of corporate loans could imply higher risk.
Write to us at marktomarket@livemint.com
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First Published: Sat, Jan 19 2008. 12 48 AM IST
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