Wipro results show all isn’t well with Indian IT sector

Wipro results show all isn’t well with Indian IT sector
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First Published: Wed, Apr 25 2012. 11 53 PM IST

Updated: Wed, Apr 25 2012. 11 53 PM IST
In the past six months, Wipro Ltd’s shares had outperformed the CNX IT index by 25%, thanks to better-than-expected results in the September and December quarters, and the hope that it would catch up with the growth rate of its peers by the March quarter. But Wipro’s disappointing March quarter results and its weak guidance for the June quarter have just poured cold water on these hopes.
Wipro’s volumes grew by just 0.8% in the March quarter and revenue in dollar terms was only marginally ahead of the lower end of its guidance. Adjusted for cross-currency movements, the company’s guidance range was between $1.53 billion and $1.56 billion. It reported revenue of $1.54 billion. In the preceding two quarters, the company had beaten the higher end of its guidance by a decent margin. On a year-on-year (y-o-y) basis, growth was only 9.7%.
The guidance for the June quarter is particularly worrying. At $1.52-1.55 billion, it is even lower than the currency-adjusted guidance target for the March quarter. And even the higher end of the band represents a mere 10% y-o-y growth.
Wipro’s shares fell 7% after the results announcement, indicating that most analysts have given up the hope of it outperforming the industry in fiscal 2013 (FY13). According to the firm, the investment banking sub-segment within the financial services vertical is facing challenges. Besides, the India business is expected to see a drop in revenue, owing to lower demand from domestic telecom firms and the government.
Wipro’s commentary hardly inspired any confidence among analysts that things will get better later in the year. What’s more, in the March quarter, it reported a drop in its total number of employees. In the first nine months of the previous fiscal year, Wipro has added 14,349 employees, at a par with 14,268 for Infosys Ltd, despite the fact that the latter’s revenue base is around 20% higher. After the drop in hiring in the March quarter, the total net hiring number in FY12 stood at 13,535 for Wipro, an 11% addition to the FY11 employee base. Infosys increased its employee base by 14.5% last fiscal.
Wipro’s results also confirm that demand for IT services is on the wane and that in the current environment, some companies such as Tata Consultancy Services Ltd (TCS) and HCL Technologies Ltd are doing relatively better because of market share gains. It is foolhardy to conclude that everything is hunky-dory and that all IT companies can be expected to report decent growth rates. The increase in competitive intensity means that pricing may come under pressure. Investors will do well to price these risks into the share prices of even the companies that are doing better than their peers.
Endnote: Standard and Poor’s (S&P) Ratings Services revised the rating outlook on TCS, Infosys and Wipro, following the revision in the outlook for its sovereign rating on India. S&P’s release said that the rating of IT companies reflect the “transfer and convertibility” (T&C) assessment of India. A T&C assessment is the rating associated with the likelihood of the sovereign restricting non-sovereign access to foreign exchange needed for debt service. It should be noted here that all three companies are debt-free and are, in fact, cash-rich. A lack of access to debt will not affect their functioning. The change in outlook, therefore, is inconsequential.
Additionally, according to S&P, Indian IT companies are rated BBB+, two notches above sovereign (India: BBB-), and already reflect their low debt position and large export revenues.
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First Published: Wed, Apr 25 2012. 11 53 PM IST
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