Tech trouble: Wipro and HCL too signal a tough year ahead

Tech trouble: Wipro and HCL too signal a tough year ahead
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First Published: Wed, Apr 22 2009. 10 24 PM IST

Price pressure: Wipro’s joint chief executive Suresh Vaswani says he expects customers to demand or renegotiate for lower pricing. Hemant Mishra / Mint
Price pressure: Wipro’s joint chief executive Suresh Vaswani says he expects customers to demand or renegotiate for lower pricing. Hemant Mishra / Mint
Updated: Wed, Apr 22 2009. 10 24 PM IST
Hyderabad: Wipro Ltd and HCL Technologies Ltd repeated the glum warnings put out by the country’s largest software exporters in the past few days, as slowing orders in their main markets in the US and Europe, pressure on pricing, and foreign exchange losses bode a tough year ahead.
India’s third biggest information technology (IT) company, Wipro, saw its revenues in the three months to end-March decline 3% from the preceding quarter but managed a slight improvement in profits with help from a depreciating rupee.
HCL didn’t have any such luck. Foreign exchange losses dragged the firm’s quarterly profits down 44% over the previous three months.
Price pressure: Wipro’s joint chief executive Suresh Vaswani says he expects customers to demand or renegotiate for lower pricing. Hemant Mishra / Mint
Last week, the country’s second largest software services firm, Infosys Technologies Ltd, posted its first-ever annual decline in dollar sales as customers cut spending. Tata Consultancy Services Ltd, the country’s biggest software exporter, too, posted declining quarterly revenues.
“One can split hairs over the numbers of Infosys and TCS or Wipro and HCL, but the trend is clear. There is continued weakness in the market,” said Sid Pai, managing director and partner at IT outsourcing consultancy TPI Advisory Services India Pvt. Ltd. “In the calendar year, market size is going to be smaller, (and the) number of deals awarded will be less. Given the weakness and reduction in IT spends in major markets, there is no organic growth to be expected in the next two quarters at least, and that is evident in the forecasts tier I players have been giving.”
Wipro’s fourth quarter revenue fell to Rs6,452 crore from Rs6,618 crore in the December quarter, while profits rose by Rs7 crore to Rs1,010 crore. Compared with the same period last year, revenue increased by 13% and profit by 15%.
The rupee’s 21% decline against the dollar in the past year has helped Wipro hold down prices, enabling US customers to save costs as they contend with the worst recession in six decades.
“(Wipro’s) results came in below estimates both on revenues and profits front,” said Dipen Shah, IT analyst with Kotak Securities Ltd. “The firm also guided to a revenue de-growth in 1QFY10 (first quarter of fiscal 2010), indicating (a) challenging macro scenario.”
Azim Premji, Wipro’s chairman, forecast revenue of $1.01-1.03 billion (Rs5,077-5,158 crore) from IT services business for the quarter ending 30 June. In the same year-ago quarter, Wipro’s IT services business fetched revenue of $1.07 billion.
“All I can say is that (the) pipeline looks good. The challenge is to convert that into actual hard numbers as decisions are becoming delayed,” said Suresh Vaswani, Wipro’s joint chief executive. “My own sense is that either the market has bottomed out or there isn’t much further to go before it does.”
Still, Vaswani expects customers to demand or renegotiate for lower pricing. “We will see a pressure of anywhere between 0-5% in new deals and existing deals, which are coming up for negotiation.”
The firm is now moving towards more fixed price projects to manage its margins better. “But the challenge for that is execution...if it isn’t (executed) properly, it could blow up. I am confident we will manage,” Vaswani said.
Prices fell by 160 basis points in the fourth quarter, said T.K. Kurien, Wipro’s president of strategic programs. One basis point is one-hundredth of a percentage point.
Meanwhile, plagued by forex losses and slower spending, HCL’s consolidated quarterly profits dived 44% to $43 million from $77 million in preceding three months. Revenue rose 11.3% to $564.4 million.
Forex losses came in at Rs202 crore, including those on account of hedge positions taken by HCL, eroding its margins. HCL still has at least $1 billion in hedge positions.
The firm has hedged $1.3 billion at Rs41 to the dollar. HCL chief executive Vineet Nayar said the firm would look at unwinding the hedges “if an opportunity (came) up”. He did not elaborate.
“(The) market should acknowledge that the core health of the company is not just in financials,” he said, adding that the firm is investing in growth and expects to start seeing results in the near future.
Forex losses are expected to hurt HCL’s profitability for the next six-seven quarters due to high hedge positions that the company has committed to several quarters ago, according to analysts.
Further, in the year ending March, the company’s revenues from its top 20 clients have fallen by at least 6%, compared with the 12 months ending December, signalling reduced IT spending or project cancellations.
“New deal flow into the funnel is slowing...because the economic situation is becoming worse and worse,” Nayar said. “Pricing pressure is indeed there.”
Bloomberg, Reuters and PTI contributed to this story.
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First Published: Wed, Apr 22 2009. 10 24 PM IST
More Topics: Wipro | HCL Technologies | Infosys | TCS | Azim Premji |