Wipro results don’t justify premium valuations

Wipro results don’t justify premium valuations
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First Published: Wed, Oct 22 2008. 11 04 PM IST

Updated: Wed, Oct 22 2008. 11 04 PM IST
The country’s third largest software services firm Wipro Ltd’s results for the September quarter were nothing to get excited about, but more importantly, had no nasty surprises either. Revenue grew by 9% on a quarter-on-quarter basis, aided by marginal volume and pricing growth as well as the depreciation in the rupee. In constant currency terms, revenue grew by a decent 5.6% sequentially, led by a 7.6% growth in the European region.
There are a few areas of concern, though. Only 352 employees were added in the core information technology (IT) services business last quarter, net of attrition. A year ago, the employee base of the IT services business had increased by 4,284 employees. According to the company, it has managed to service clients by increasing utilization rates of its current employee base. While this is a clear sign of belt-tightening, worries about the company’s ability to cater to future growth without an adequate number of IT professionals may be premature, simply because it still operates at a relatively low utilization rate of 70%.
Another concern is the relatively low level of new client additions—at 28 and 31 in the last two quarters, compared with an average of 50 in the preceding three quarters. Besides, the number of active customers has dropped from 928 to 906. According to the company, it is increasingly focusing on productive clients; in other words, it has dropped unproductive clients.
Thankfully, this ties up with the data on client profile. Wipro has seen an increase in the number of clients across various sizes. At one end, the number of clients with trailing 12-month revenue exceeding $1 million (Rs4.9 crore today) has increased from 404 in the June quarter to 426 in the September quarter, while those generating more than $50 million in annual revenues have increased from 14 to 16.
One negative surprise, at least from a retail investor’s perspective, was the firm’s decision to not give out any interim dividend. Note here that Wipro’s dividend payout has been low traditionally and investors generally get in for capital appreciation. But for the retail investor base, the decision may be unpopular. Given the current tight liquidity condition, however, it makes sense to hold on to cash.
The main worry about Wipro currently is the high level of foreign currency hedges—at least $2 billion at the end of September. On a mark-to-market basis, the company is sitting on losses of about Rs1,300 crore on its balance sheet related to some of these hedges. Some of the losses on contracts booked at lower rates of Rs39-42/$ are reflected in the profit and loss account, but some (those that qualify for hedge accounting) are transferred to the balance sheet. These losses will flow to the profit and loss statement in the next few quarters and would hurt performance, unless of course the rupee reverses its recent losses by then.
Despite the sharp fall in Wipro’s share price in recent weeks, it still trades at a substantial premium to rivals such as Satyam Computer Services Ltd and HCL Technologies Ltd, though its growth rates aren’t superior. Unless the company’s growth rate picks up substantially relative to its peers, there is room for underperformance for its stock in the future.
Write to us at marktomarket@livemint.com
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First Published: Wed, Oct 22 2008. 11 04 PM IST