Wipro well placed to grow its revenues and margins

Lower utilisation rates and longer-term hedges to help expand margins in FY15

Infosys and Tata Consultancy Services (TCS) might have created a minor flutter in the market after hinting at a weak quarter but this does not signify a secular trend for the information technology (IT) sector for the next financial year. The performance of companies could vary, depending on their strategy and the levers available to improve profitability. As the fourth quarter of FY14 draws to an end, there are several factors that will impact the performance of tier-I entities.

While the ability to win deals is a key determinant to growth, managing profitability is another factor that will determine shareholder returns. Though revenue growth of S&P 500 companies has remained largely tepid, analysts believe the deal renewal market is still big, even if new deals are declining since 2013. Tier-I entities are better equipped to win deals. The other factor that is key is the rupee’s appreciation during this quarter. This would have an impact on margins and profitability, as several have reduced hedging positions and durations. Few companies have levers to improve margins in the face of the rupee’s appreciation. In this environment, Wipro has emerged as one stock that analysts like.

For starters, the company is done with investing in business development over the past couple of years and this is visible in the deal pipeline, which has doubled with the “must-have accounts”, claim analysts. The company is also focused on using all the levers of margin improvement. While other tier-I players have reduced the amount and duration of hedges, Wipro has hedges of $1.4 billion for the next 12 months, accounting for 20 per cent of revenue. Infosys has hedges outstanding of $1 billion for the next three months, adding to 11 per cent of revenue. TCS has hedges of $2.3 billion for the next six months, accounting for five per cent of revenue. K R Choksey believes few tier-I companies have levers to manage an upswing, if at all it happens after the elections. One key lever to improve margins in the face of a currency swing is utilisation and onsite revenue share in the overall revenue mix. Most tier-I companies are functioning with utilisation levels near 80 per cent and might find it difficult to improve further. Wipro has utilisation of 74 per cent and can easily improve it in case of a currency upswing; its onsite revenue mix is 54 per cent.

Prabhudas Lilladher, the financial advisory, says the management continues to focus on productivity improvement and skill development of employees to increase fungibility, which would help drive up utilisation. “Moreover, as the fixed price component has increased steadily, the investment in hyper-automation would trigger margin improvement.” Analysts expect Wipro to expand margins by 100 basis points in FY15.