While its numbers are not as bad as Infosys?, demand remains uncertain
The Wipro stock ended three per cent lower on Tuesday, in reaction to its results and a muted guidance. Like Infosys, Wipro missed its guidance, though marginally. Against a guidance of $1,520-1,550 million (Rs 8,512-8,680 crore; assuming Rs /$ value of 56), Wipro posted sales of $1,515 million (Rs 8,484 crore) for the quarter ended June 2012. Net profit increased to Rs 1,580 crore, from Rs 1,490 crore in June 2011, against market expectations of Rs 1,595 crore.
Wipro also gave a muted outlook resulting in a fall in the stock price. Its guidance at $1,520-1,550 million for the second quarter is the same as it had given for the first quarter. Analysts were expecting a two to four per cent sequential growth in its guidance for the September quarter. Like Infosys, Wipro’s results highlight the trouble faced by the software services sector in both Europe and the US. While Infosys stopped providing the next quarter’s guidance, Wipro is expecting marginal to flat growth in its business.
Clearly, Wipro’s top line is under stress, and this is likely to continue. Constant currency revenue growth was only 0.3 per cent. However, this resulted in a revenue decline of 1.4 per cent on cross-currency impact. Wipro has been facing pricing pressure; while onsite price realisation fell 0.9 per cent, offshore realisation slid two per cent. It has not been able to increase its onsite revenues for the last three quarters and most of the volume growth is coming from higher offshore services.
The Street isn’t excited about Wipro’s small margin improvement. Despite having no wage rises, Infosys’ margins were down in the June quarter. Wipro, after implementing a wage hike, saw its earnings before interest and taxes (Ebit ) margin rise 30 basis points on a sequential basis, to 21 per cent. This was largely helped by gains on the currency front.
However, wage rises haven’t insulated Wipro from higher attrition. Similar to Infosys, Wipro, too, is facing attrition issues, with involuntary attrition jumping to its highest level since December 2009 at 3.2 per cent in the June quarter, while overall annualised attrition stood at 18.4 per cent. In terms of growth in verticals, apart from manufacturing, all other segments posted lower sequential revenues. Finance Solutions, which accounts for over a quarter of revenues, posted a two per cent sequential decline, while retail and transportation revenues fell 3.9 per cent. Manufacturing, which contributes nearly 20 per cent to Wipro’s revenues, grew just 0.5 per cent.
Contribution from US markets fell 2.2 per cent; while Europe grew 0.3 per cent (constant currency growth was much higher at 1.4 per cent). Asia-Pacific grew a surprising 5.3 per cent — accounting for 10.2 per cent of Wipro’s sales.
Apart from TCS, results of Infosys and Wipro suggest slowing demand and rising competition in the sector. With Wipro keeping its September quarter at Q1 levels, the volatile nature of the market gets highlighted. And, if businesses are facing volatility with a downward bias, stock prices will only reflect this reality.
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