Wipro 18% net tops estimates, but revenue projection spoils IT party

Company expects Q4 services revenues to grow 0.5-3% on uncertainty in IT deals space

Software to consumer care goods company Wipro on Friday reported better-than-expected Q3 numbers for its flagship IT services business. The Bangalore-based company posted an 18 per cent growth in its net profit to Rs 1,716 crore, compared with the same period in the previous year. Revenues, aided by a 34 per cent growth in the consumer care and lighting business, increased by 10 per cent to Rs 11,025 crore.

However, the company projected a muted guidance for the Q4 of FY13, dragging its share prices on the bourses. Wipro’s shares closed at Rs 397.15 on the BSE, down eight per cent from the previous close.

Wipro’s flagship IT services business, which accounted for 78 per cent of the total revenues and 92 per cent of the operating income reported in the quarter, posted a 13 per cent rise in its operating profit at Rs 1,792 crore, compared with the year-ago quarter. Revenues from IT services grew 13 per cent to Rs 8,602 crore year-on-year (y-o-y). Compared with the previous quarter (Q2 of FY13), the operating profit of Wipro’s IT services business went up by 3.5 per cent and revenues grew 2.7 per cent.
 

WIPRO’S IT SERVICES STRENGTHS & WEAKNESS IN Q3
Strengths … Strong operating profit and revenue growth: 13% each  Healthy client addition: 50 Improvement in operating margin: 10 basis points Improvement in pricing: 1.5%	Weaknesses … Conservative revenue growth guidance for Q4: 0.5 - 3% Decline in volume growth: -1%  Lower employee utilisation: 74.8% compared with 77.9% in Q2 of FY13 Flat growth in Americas: -0.7 %

The dollar term revenues of $1,577 million reported in the quarter was broadly in line with its expectation of $1,560-1,590 million given for the quarter. For the quarter ending March 31, Wipro has given a revenue guidance of $1,585 million to $1,625 million, indicating flat growth of 0.5 per cent to 3 per cent.

Despite seeing a decline in volumes in its IT services business by one per cent, the company posted a 10 basis points (bps) improvement in its operating margin at 20.8 per cent. This was primarily aided by the productivity improvement and an increase in the blended pricing by 1.50 per cent.

“The one per cent de-growth in volume is disappointing, though the productivity increases are significant. Increased efficiency in run-the-business projects has come at the cost of volume growth,” said Dipen Shah, head of private client group research, Kotak Securities. According to Rumit Dugar, analyst (Indian IT and telecoms research) at Religare Capital Markets, the wide revenue guidance range for the next quarter suggests the volume outlook is uncertain.

Other than the decline in volume, the company also saw a marginal 0.7 per cent drop in its sequential revenues from Americas, its largest market accounting for close to 50 per cent of the revenues.

Wipro’s management, however, reposed strong faith on the demand environment and said discretionary spending by the clients has started to open up.

“The overall macro-economic factors are stabilising globally. The US economy has shown improvement, which is evident from improved consumer demands and improvement in employment data. Europe is steady and not showing any negative signs,” said Wipro Chairman Azim Premji.

However, the company showed strong growth in Europe, which grew 7.5 per cent sequentially followed by the Indian and Middle East business (3.7 per cent) and Asia-Pacific and other emerging markets (3.4 per cent). Healthcare and life sciences grew the fastest on sequential basis at 7.1 per cent, followed by retail and transportation at 3.1 per cent, and energy and utilities at 2.4 per cent.

During the quarter, the company hired 2,336 people for its IT services business, which took the headcount to 142,905. Attrition at 14.2 per cent was the lowest during the past 12 months.

Apart from software services, Wipro also keeps interest in soaps and lighting, infrastructure engineering products.