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Wait for Wipro’s turnaround continues

Wait for Wipro’s turnaround continues
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First Published: Wed, Apr 27 2011. 10 55 PM IST
Updated: Wed, Apr 27 2011. 10 55 PM IST
Until the last quarter, investors in Wipro Ltd had to cope with the fact that the company’s financial performance was the weakest among top-tier firms. In the quarter ended 31 December, for instance, volumes in the company’s IT (information technology) services business grew by just 1.5% sequentially, compared with a growth of 5.7% for Tata Consultancy Services Ltd and 3.1% for Infosys Technologies Ltd.
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But this wasn’t the case in the March quarter. Wipro’s IT services division reported 1.9% growth in volumes for the March quarter, better than the 1% decline in volumes reported by Infosys. The company’s investors, however, were still disappointed. This wasn’t to do so much with the March quarter results, which were more or less in line with expectations.
This time around, Wipro’s revenue guidance for the next quarter was lower than expected. Analysts were expecting the company to guide for an increase of at least 3% in the June quarter revenue compared with the preceding quarter. Instead, the company said that revenue is likely to remain flat at the March quarter level of $1.4 billion (around Rs 6,220 crore today).
According to Wipro, its performance in the March quarter benefited from growth in the BPO (business process outsourcing) business in the telecom space and also because of growth in fixed price projects. Some of this additional business is lumpy in nature and would not continue in the June quarter. To be sure, the telecom business segment and the BPO service line recorded a sequential increase of 10%, more than double the rate at which the total revenue of the IT services business grew (4.2%).
Even so, as one analyst with a foreign brokerage puts it, the flat revenue growth guidance for the June quarter is disappointing and analysts are likely to cut their earnings estimates for the current fiscal. While the Street has been anticipating that Wipro will lag behind peers in growth because it’s in the midst of an organizational restructuring, it now looks like growth may be even lower than the muted expectations.
Operating profit margin narrowed by 37 basis points, which comes as a slight disappointment. One basis point is one-hundredth of a percentage point.
First, the drop in margins is despite a favourable movement in foreign exchange. Besides, the company’s margins haven’t recovered after the drop in the September quarter owing to promotion-linked salary hikes and the issue of a large number of stock options to employees below the market price.
According to another analyst with a foreign brokerage, Wipro will continue to face pressure on margins as it would have to make investments in sales and marketing to boost revenue. Besides, it looks like the company would have to give relatively higher salary hikes to contain high attrition levels.
In this backdrop, the performance of Wipro shares should continue to be lacklustre for at least the next couple of quarters, or until the fruits of the company’s restructuring programme become visible.
Graphic by Sandeep Bhatnagar/Mint
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First Published: Wed, Apr 27 2011. 10 55 PM IST