Wipro beats forecast with 18% profit rise

Wipro beats forecast with 18% profit rise

Bangalore: Wipro Ltd, India’s third largest IT services company that also sells computers and soaps, said net profit rose 18% to Rs824 crore in the second quarter compared with the same period in the previous year, on the back of larger contracts from overseas and domestic customers.

However, the gross margins of the company dropped 1.9% due to the rupee’s rise against the US dollar.

“There has been a 3.9% adverse impact due to foreign exchange; it has been muted to better utilization, pricing, bulge mix and productivity," said Suresh Senapaty, chief financial officer of Wipro.

The real story behind the numbers, however, may have to do with a natural hedge Wipro has built for itself against foreign exchange risks—its other businesses.

In the quarter ended September, the contribution of these businesses, including consumer products such as soaps, computer hardware (and software in the domestic market) and infrastructure engineering services, grew to around a third from less than a fourth in the corresponding quarter of 2006-07.

In the full year ended March 2006-07, software services accounted for 74% of the company’s revenues of Rs15,000 crore, with the other businesses accounting for the remaining 26%.

Wipro has made significant investments in the other businesses. In July 2007, it acquired the Singapore-based consumer products maker Unza Holdings Ltd for $246 million (Rs994 crore then).

Revenues in the quarter rose 35% over the year-ago period. However, the company’s pre-tax and pre-interest profit margins (or PBIT margins) declined to 22.4% from 24.3%. And revenues for the software services business grew 19%.

“The deal pipeline continues to be robust," said Azim Premji, the billionaire chairman of Wipro, even as he downplayed concerns of a slowdown in the US forcing companies there to slash their IT spends. The US is the biggest market for Indian IT companies. In the current quarter, 63% of Wipro’s revenues came from that country.

“My personal judgement is that there won’t be any impact. Going forward, you can see more share for large Indian services in the global outsourcing space," Premji added.

That confidence was evident in the company’s forecast for its software services (or global IT services as the company terms it) business. Wipro forecast stronger business growth in the current quarter to $905 million, or Rs3,602 crore, for this business, including $60 million, or Rs239 crore, from acquisitions. The third quarter is usually the weakest quarter for Indian IT companies as they have less billable days due to the holiday season in the US and Europe.

Analysts said Wipro’s numbers were better than expectations. “The positive surprise is the increase in prices from customers—around 1.9% in blended rates," said Rishi Maheshwari, a technology analyst with Networth Stock Broking Ltd in Mumbai. The company has shown that the Infocrossing acquisition was a right decision with the new orders that it has bagged (because of this), he added.

Wipro added 59 clients in the quarter, including one from the government of the state of Missouri in the US that was won by Infocrossing Inc., the American IT services company it acquired in July for $600 million.

However, an analyst with a Mumbai-based securities firm, who did not want either himself or his company to be identified because his company is readying an initial public offering, said Wipro’s sales could be hit because of sluggishness in the “product engineering vertical, which includes telecom and semiconductors".

Indian technology service vendors are witnessing robust demand for their services in the US and Europe as global corporations such as General Motors, General Electric and British Gas Transco increasingly outsource technology application development and maintainance work offshore to low-cost destinations like India, China and the Philippines.

Wipro’s peers such as Infosys Technologies Ltd and Tata Consultancy Services have also posted results that are better than expected. Infosys said profit grew 18.4% to Rs1,100 crore on sales of Rs4,106 crore, and TCS, India’s largest software services company, reported a 26% gain in profit to Rs1,252 crore.

Wipro announced its results before trading commenced on the Indian stock markets. The company’s shares on the Bombay Stock Exchange (BSE) ended the day at Rs500.55 each, a fall of around 1% from their previous close. BSE’s benchmark index, the Sensex, fell 2.4% to 17,559.98, while BSE’s sectoral index of technology firms was up 0.21%.