First-quarter numbers seal Wipro’s fate as a laggard

If there were hopes of Wipro’s information technology (IT) services revenues catching up with peers Tata Consultancy Services (TCS) and Infosys Technologies during the current fiscal, its first quarter result has quashed them.

It was a whimper of a start for the third-largest tech company with 0.5% dollar revenue growth sequentially at $1,408 million for the first quarter of this year. And this meagre growth has come after taking into consideration the consolidation gains from the recent acquisition of SAIC’s oil and gas IT business. Minus that, it’s a negative growth for the company at $1,398 million, down 0.14% from the March quarter revenue of $1400 million.

Last quarter also saw the company’s net profit slip by around 3% on the impact wage hikes and higher effective tax rates on removal of tax breaks under the software Technology Park of India (STPI) scheme since April this year.

“A wage hike of 10-12% and 3.1% higher effective tax rate had a sequential impact on our net profit in the first quarter of this fiscal. We see a similar impact on operating margin in second quarter from these twin factors,” said Suresh Senapaty, chief financial officer of Wipro.

Given the internal and external headwinds, the company has given a cautious revenue growth guidance of 2-4% of between $1,436 million and $1,464 million for the September quarter. With quarter-on-quarter inorganic revenue growth benefit from SAIC estimated to be around 2%, it means that organically Wipro will grow at just 0-2% in this quarter - marring any chance it had of coming close to its peers in terms of growth.

Nimish Joshi, analyst with foreign brokerage firm CLSA, does not see the Azim Premji-owned tech firm closing gap with rivals in the current financial year.

“Wipro’s revenue growth has lagged both peers Infosys and TCS in FY10 and FY11 and a poor start to FY12 implies it will once again lag peers by a margin this year,” he wrote in a note to his client on Wednesday.

What has flummoxed Joshi is that Wipro has let down investors despite a watered down expectation. “Given the organisational flux, street expectations from Wipro were low. However, Wipro’s June quarter has missed even moderated expectations. Wipro’s current revenue momentum implies that Wipro could potentially grow slower than the industry growth rate (Nasscom has projected a 16-18% growth in IT/BPO exports for FY12),” wrote the disappointed CLSA analyst.

Premji told reporters during the earnings call “stability” at Wipro would return in the third quarter; “We (Wipro) will come back to stability in the third quarter and significant growth thereafter.”  

Even TK Kurien, chief executive officer of Wipro, believes benefits of restructuring would kick in soon. “We grew at 0.5% (in June quarter). However, as we exit the quarter we are lot more positive with the new structure and we have seen some early results in the verticals that we call momentum verticals like banking and financial services (BFS), healthcare and pharma, retail and energy and utilities.”

But CLSA’s Joshi cautioned investors against “excessive optimism” on the Wipro stock. “Volume momentum remains weak (just 1.8% QoQ growth in last two quarters) and given the nature of the IT business, a sudden pick-up in the second half is difficult. Also, hopes of a big second half pick-up have seldom borne fruit in the past.”

He said Wipro’s result was likely to cool down the optimism on industry-wide pricing, which was prevalent ahead of the results.

“Infosys, TCS and now Wipro have all reported declines in constant currency realisations and this implies that getting price hikes in the current environment is much tougher than thought earlier and this could have implications for FY12 margin performance. Clearly, the industry-wide volume growth is not being accompanied by pricing up-tick despite this being the third year of volume upswing.”

The company’s earnings before interest and taxes (EBIT) margins fell 10 basis points (bps) sequentially at 21.96%. This is a better-than-expected performance driven by better utilisation.

Amneet Singh, vice-president, global sourcing, Everest Group, feels the impact of salary hike was not very pronounced on Wipro’s margins in the first but going forward, the company may face challenges to sustain its current margin levels in the light of pricing pressures, currency fluctuations, and the remnant impact of salary hikes.

The company’s volume growth in June quarter was 1.8% while its onsite pricing in constant currency terms was down 1.7% sequentially and offshore 1.2%. Its voluntary employee attrition at 23.2% is still much above peers and utilisation of ex-trainees was at 81% and including trainees at 76.9%.