Wipro: Peer pressure

The company lagged peers in revenue growth, reflecting a weaker tap into the strong IT demand rebound.

Wipro anticipated last year’s slowdown ahead of the pack and effectively countered it with cost-control measures, but hasn’t been as effective in reaping the benefits of the demand rebound. While Infosys and TCS saw strong sequential revenue growth, Wipro disappointed with middling numbers in the September quarter, for the fifth time in a row.

Constant currency revenues for information technology (IT) services increased 5.7 per cent sequentially to $1,261.2 million, compared to the above-guidance revenue growth of 11.7 per cent for TCS and 10.2 per cent for Infosys.

It also reported a 250-basis-point (bp) operating margin compression to 22.2 per cent for IT services, attributed to salary hikes and lower forex gains. This contrasted with a 194 bps and a 86 bps sequential margin expansion for Infosys and TCS, respectively.

The problem for Wipro stems from its relatively lower exposure to banking and financial services (BFSI) compared to peers, which benefited from a return of discretionary spending by clients in this space, reckons an Edelweiss research report, besides its relatively lower US revenue base.

For Wipro, growth came from the retail segment (9.7 per cent sequential rise), while the BFSI segment, which contributes 27 per cent to revenues, grew 5.7 per cent. Europe saw strong growth of over 10 per cent, helped by favourable currency moves.

With fewer cost-side levers, given supply-side pressure through high attrition at 19.4 per cent (16 per cent in the previous quarter) and industry-wide wage hikes, revenues will be the key to margins. Therefore, the muted guidance of 3.5-5.5 per cent sequential increase in revenues to $1,317-1,343 million was a dampener, as compared to TCS, which will see price increases in the next financial year.

The stock has fallen over eight per cent since the results on Friday to Rs 430.3, aligned with downgrades in earnings estimates. It trades at a price to earnings valuation of about 19.4x consensus 2010-11 earnings per share estimates.