Wipro Ltd disappointed with a 3% sequential drop in revenues and a 13% fall in operating profit in the June quarter. On a year-on-year (Y-o-Y) basis, operating profit growth was abysmally low at 9%. Its core global IT services and products business (which accounts for 87% of operating profit) did worse with a mere 6% Y-o-Y growth in profit. Wipro’s top two competitors, Tata Consultancy Services Ltd (TCS) and Infosys Technologies Ltd, did much better with growth rates of 30% and 20%, respectively. And remember that Wipro didn’t even have to contend with the impact of higher salaries like its peers—it will give salary hikes only in August.
At the heart of Wipro’s problems is the lack of rate increases from its clients. In its IT services business, average onsite rates rose just 1.9% over the year-ago quarter, while offshore rates fell by 0.9%. In comparison, Infosys’ average billing rates jumped 6.7% and 5.3%, respectively, for its onsite and offshore businesses. The Wipro management conceded during a conference call with analysts that “it is disappointed with the kind of price increases it has been able to take, especially in the past 12-18 months”.
One of the reasons TCS and Infosys have been able to hold operating margins at close to last year’s levels was an increase in billing rates. But devoid of this, margins at Wipro’s global IT services have fallen by 300 basis points Y-o-Y. Within this, the BPO (business process outsourcing) business seems to have turned around smartly. Typically, every percentage point rise in the rupee hits BPO margins by about 80 basis points, as opposed to a hit of 40-50 basis points on the IT services business. But despite these odds, Wipro’s BPO unit reported a 250 basis points jump in operating margins. It’s the software services business that’s struggling—margins here fell sharply, leading to a mere 3.5% Y-o-Y increase in profit.
In spite of this gloomy picture its June quarter results have painted, Wipro shares stood firm at its pre-results level of Rs505. One of the reasons for this could be that the stock’s past underperformance has already taken care of the disappointment in the results. Another could be the relatively bright picture the company has painted for the near future. It expects revenues of its global IT services business to grow by 7% sequentially, buoyed by a recent $130 million (Rs525 crore) contract it won in Europe. The company also said it expects to maintain margins despite the 140-150 basis points hit its offshore salary hikes will have on profit in the September quarter. But even that hardly justifies Wipro’s valuation of 23.8 times trailing earnings, which is much higher than the rate at which the company is growing earnings.
Larsen and Toubro
That rupee appreciation is not uniformly negative for all Indian companies, even those that earn a sizeable chunk of their revenues overseas, has just been proved by the results of Larsen and Toubro Ltd. As much as Rs88.1 crore of its profit after tax (PAT) of Rs376.9 crore for the June quarter is on account of exchange differences on foreign currency borrowings and deposits.
Adjusting for that bonanza, the company’s PAT is up 57% compared to the year-ago period. That’s well above last fiscal’s 39% rate of growth, although it is a tad lower than the 60% PAT growth rate seen in the first quarter of FY07, after adjusting for extraordinary items. While the 29.6% Y-o-Y rate of growth in revenues is an indication of the strength of the country’s infrastructure and capex boom, L&T’s ability to have an even higher rate of net profit growth demonstrates its ability to pick and choose the best projects, including high-margin hydrocarbon orders. Its operating margins have increased by 240 basis points, compared to the year-ago period. Growth in operating profit is 74%, well above the Y-o-Y growth of 47% recorded for FY07. Its order inflow, at 32% compared with the first quarter of FY07, is in line with the management’s guidance of a rise of around 30% in order inflow for the current year. The order book backlog is now equivalent to around two years’ revenues and the pace of order flow is accelerating—this month the company has already obtained orders worth more than Rs4,000 crore from Tata Steel Ltd, Indian Oil Corp. Ltd, Power Grid Corp. and from overseas. With that kind of growth, and with the June quarter showing that the improvement in margins is sustainable, the stock’s valuation at almost 30 times FY08 earnings seems fair.
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