Wipro: Environment remains challenging

Few positive triggers as BFSI spends drop and clients delay decision-making

The weakness in the global banking, financial services and insurance (BFSI) segment continues to impact information technology (IT) services companies. In an analyst meet, Wipro highlighted that short-term issues persisted in BFSI, especially the investment banking segment, which was witnessing spending cuts and pricing pressure. A number of banks in Europe and the US have announced job cuts in the sector.

The BFSI space is keenly watched as it is one of the largest users of IT, with regular spends on maintenance and updates. In a report, Nomura said around 70 per cent of BFSI spends in IT were for routine banking operations, but the proportion was set to change. The Dodd-Frank reforms in the US and the Basel-III and Solvency-II guidelines in Europe would drive new business in BFSI, and the contribution of this regulatory spending is expected to rise to 60 per cent. However, as of now, regulatory spending hasn’t begun in a big way.

Wipro’s meet also highlighted the changing dynamics of the IT sector. Though IT spends are expected to be flattish at best, budgetary power in the hands of the chief investment officer (CIO) is shrinking. That’s because decision-making has shifted beyond the CIO level, with only 40 per cent of IT budgets being handled by CIOs, the rest being decided by chief financial officers and chief executive officers. The shift in decision-making has added to delays in closure. Another change is that vendors that are good at problem-solving or help drive costs down are winning deals.

According to Azim Premji, while Wipro had a strong deal pipeline, closure of new deals is being delayed on account of a volatile macro-economic scenario across the globe. To deal with the slowdown, the company has identified 138 accounts, which have the potential to grow.

As for its financials, the company would benefit from rupee depreciation in the first quarter of 2012. However, its revenues in dollar terms are expected to be flat. Despite pricing pressure in the investment banking space, Wipro expects to improve margins. Over the long run, it would be taking measures to reduce costs through greater automation, reuse of tools and shared services across verticals. However, in the near-term, the company is heavily dependent on its existing deal pipeline, with new orders two-three quarters away, say analysts. Like Infosys, Wipro is also expected to grow at a slightly slower pace, compared to the industry. With no immediate upside triggers, the stock may underperform the sector, too.