Better realisations and demand scenario along with stable margins suggest that the going should be good for Wipro.
IT stocks were outperformers in the recent past on the back of improving business fundamentals. Wipro’s stock was also a major gainer and delivered around double the returns that BSE Sensex could muster in the last three months. Last Tuesday, Wipro’s second quarter results beat Street expectations, with consolidated revenues growing at 10.4 per cent sequentially. Operating margins inched up, while a spurt in other income helped net profit grow faster. The management indicates that the worst in sectors like telecom is over and could see better volumes in its technology business.
Better realisations
Wipro’s IT services business had seen flattish volumes during the September quarter as compared to the June 2009 quarter, however better price realisations of 4.7 per cent helped boost revenues by 3.5 per cent. Compared to its peers that have reported a drop in pricing during the September quarter, Wipro’s realisations were better and helped by higher billing rates. In the technology business, both high-tech and telecom revenues declined 2.2 per cent this quarter, suggesting that tough times still surround these sectors. The two, which earlier accounted for about 20 per cent of revenues, have seen their share in revenues decline in the preceeding four quarters to 16.8 per cent now. Notably, BFSI, manufacturing and energy verticals held out well. Wipro’s management expects that technology and telecom sectors have bottomed out, which along with a demand improvement in BFSI, augurs well for a company that derives over 40 per cent revenues from these verticals.
Stable margins
The IT services division (75 per cent of revenues) saw its margins improve 150 bps to 27.3 per cent during the quarter on account of favourable cross-currency benefits, improved realisation and better utilisation rate. On the other hand, the low-margin IT products business that contributes around one-fifth of overall revenues has seen good traction (grew at 55 per cent sequentially). A higher proportion of revenues from IT product business along with a decline in margins in the Consumer Care business squared-off most of the overall margin increase.
Outlook
BPO and Application Development Services did well during the quarter with major uptick from Europe. The deal pipeline is expected to be better in the current quarter, indicating that stability is returning and volumes should improve in the coming quarters. Wipro’s management says that its Q3 2009-10 IT services revenues would grow by 2.5-4.5 per cent to $ 1.09-1.11 billion. At Rs 608, the stock trades at 17 times estimated 2010-11 earnings, and can be considered on dips.