Home >Markets >Mark To Market >Wipro pleasantly surprises with better than expected profit margins in June quarter

IT services major Wipro Ltd managed to beat the modest earnings expectations. The 7.5% sequential decline in constant currency revenue in June quarter is slightly lower than Street estimates.

Importantly operating profit margin of 19%, a 140 basis points improvement from March quarter exceeded analysts’ expectations. Margins are up 60 basis points from the year ago quarter. This helped the company improve net income slightly despite a notable fall in revenue. Dollar earnings grew 2.6% sequentially. “Margins beat our expectations on the back of currency tailwind, higher utilization and better cost management, partially offset by provision for doubtful debt," says Sanjeev Hota, head of research, Sharekhan.

Fearing covid-19 disruption to service delivery, business volumes and negative operating leverage most analysts were expecting Wipro to report a notable fall in operating profit margins. Besides, industry leader Tata Consultancy Services Ltd reported a 150 basis points sequential fall in operating profit margins for the June quarter last week. “We expanded the margins during the quarter, despite lower revenues, on the back of solid execution of several operational improvements and rupee depreciation," Jatin Dalal, chief financial officer, Wipro said in a statement.

The profitability improvement reflects the benefits of cost rationalization. The company aggressively spends on variable workforce and stepped up utilization of the internal employees. Gross utilization rose from 73.4% in March to 75% in the quarter ending June.

The company expects to maintain the margins in the tight band, barring reinvestments which may raise expenses for a short duration. The newly appointed chief executive officer (CEO) and managing director Thierry Delaporte echoed the views underlining the thrust on profitable growth. “Profitable growth will be the most important priority on my agenda," says Delaporte. The new CEO hopes to finalize an improvement or action plan over the next few weeks.

Wipro meanwhile is seeing incremental improvement in the business environment. It is seeing good demand for digital, cloud and infrastructure services, which fared relatively better in the June quarter. “We certainly have much greater visibility than at the beginning of the Q1," the management told analysts adding it cannot accurately predict the demand and revenue trajectory due to underlying volatility and uncertainty.

The commentary and strong performance on profit margins will likely impress investors. The new CEO action plan and recovery will be key to watch out for.

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