Wipro Q1 in line; bets on healthy demand

Wipro, India's third-largest IT services company, on Thursday posted a profit of Rs 2,118 crore that was largely in line with expectations for the June 2014 quarter, but the surprise came from a stronger guidance for its IT services business on the back of healthy order booking and demand from key geographies.

The Bangalore-based company's net profit of Rs 2,118 crore in the quarter ended June 30, 2014 was up 30 per cent over the corresponding period last year, while the revenues increased 14 per cent on a year-on-year (y-o-y) basis to Rs 11,136 crore. Consensus Bloomberg estimates had pegged its net profit and revenues at Rs 2,125 crore and Rs 11,335 crore, respectively.

The revenues of the company's IT services business saw a growth of 18 per cent, y-o-y, at Rs 10,508 crore whereas the operating profit at Rs 2,400 crore grew 31 per cent y-o-y.

Even as this was the fourth consecutive quarter of growth in line with expectations for Wipro, chief executive officer T K Kurien said: 'It is still work-in-progress."

"We continue to win large deals particularly in the application and infrastructure space. We recently announced our largest-ever total outsourcing deal," said Kurien, adding: "But I think it is too early to declare victory. We have to hit a sequential growth rate of four per cent, and when we hit that, we will say that the job is done. But till then, I would say that there is a lot of merit in being paranoid, because that helps you perform better." In dollar terms, Wipro's IT services revenue was close to the upper end of its guidance, at $1,740.2 million, a sequential increase of 1.2 per cent. For Q1 of FY15, Wipro had guided its IT services revenues to be between $1.71 billion and $1.75 billion, a sequential decline of 0.3 per cent to an increase of two per cent.

For the quarter ending September 30, 2014 (Q2 of FY15), the company said it expects IT services revenues to be in the range of $1,770 million to $1,810 million, implying a growth of 1.7 per cent to 4 per cent, on a sequential basis. This is amongst the best guidance by the company in several quarters.

"We see a significant rise in business confidence in developed markets as well as India. The new government at the Centre has brought about hope and confidence in the minds of all stakeholders through reform pronouncements with fiscal prudence," said Azim Premji, chairman of Wipro.

Added Kurien: “There are plenty of opportunities in the market, and we have a healthy deal pipeline. Discretionary spending is coming back in the US, we see some pockets of weakness but that’s industry-led or specific client-led, nothing else”

MAJOR METRICS
In the just-ended quarter, Wipro saw a rebound in demand from the domestic as well as Middle East markets where it posted 5.3 per cent sequential growth in revenues. The growth from key Americas market was moderate at 0.8 per cent, whereas in Europe it saw a sequential decline of 0.3 per cent.

The company also managed to keep a tab on the operating margin of its IT services business, which declined in line with the trend witnessed by its peers. Operating margin at 22.8 per cent, was reasonable in a quarter when it effected wage hike across all its employees. Wipro’s operating margin for IT services business in the previous quarter stood at 24.5 per cent.

“The (sequential) decline in profit and margins is mainly due to the wage hikes,” said executive director and chief financial officer Suresh Senapaty. “We continue to drive operational efficiency and invest in our strategy.”

Wipro had effected an average eight per cent increment to offshore employees and two per cent to onsite staff, which came into effect from June 1, 2015.

The company saw an uptick in attrition during Q1 of FY15 at 16.1 per cent, against 15.1 per cent in the previous quarter. The April-June period is typically the time when attrition at IT services companies rises, as employees look to opt for better opportunities after salary increments or leave jobs to study further as academic years begin.

“We have given restricted stock units and salary increases so we expect to see impact of that in the coming quarters,” Saurabh Govil, senior vice-president, human resources. “Also, we are seeing that attrition rates have fallen drastically among high performers at Wipro, which makes for about 25 per cent of our total workforce and are important for us.”

Wipro added 1,399 people on net basis during the quarter, taking its total headcount in the IT services business to 147,452.

Wipro scrip currently trades at 16.5 times FY15 estimated earnings, which is at a premium to Infosys (15 times), its closest peer. Analysts believe these valuations are reasonable though they think it will take some more time for the company's revenues to grow in line with the industry.

“Both large deals and mining of existing clients is key for growth. Wipro at any given point in time has only one of the two elements working for it. Revenue growth can accelerate to 4-5 per cent sequentially if both elements work in tandem. For now, steady guidance and inexpensive valuations would suffice for reasonable returns,” Kotak Institutional Equities wrote in a post-results note on the company.

BOARD CHANGES
Earlier this month, Wipro announced that independent director Henning Kagermann resigned from the company’s board and two other directors - B C Prabhakar and Shyam Saran - decided not to seek re-election. Kurien said the company would look to add more independent members to its board.

“From a corporate governance perspective, we would like to have more external directors than internal directors. I think it is important to have a strong board that would challenge the management,” Kurien added.