Wipro Q1 disappoints Street

Q2 guidance, one of the most bullish in several quarters, shows signs of growth revival

Information technology services provider Wipro Ltd managed to join the positive tone set by peers Tata Consultancy Services (TCS) and Infosys Ltd, indicating that there is indeed an uptick in demand for technology. However, the company’s results for the quarter ended June 30 didn’t have much to cheer about.

Wipro estimated US dollar revenue of $1,620 million to $1,650 million, representing a growth rate of 1.9 per cent to 3.8 per cent for the second quarter ending September 30, much ahead of street expectation.

Nimish Joshi of CLSA, in his post-earnings note on Wipro, said the company’s report confirmed the thesis of improved demand in the current year. “After better top line and positive commentary from Infosys and TCS, Wipro’s guidance and commentary also indicates a pick-up in deal closures and improved order-booking. All of this should flow through in revenues over the next six months.” (Click for table)

Wipro, like Infosys that underwent a restructuring almost two years back, surprised the analysts on guidance. “This is for the first time after several quarters that the company has given such a bullish guidance. The guidance of about two-four per cent for the second quarter has not happened at Wipro. However, concerns on growth continue,” said Ankita Somani, IT analyst at Angel Broking.

The company’s struggle to get growth back was evident in its first quarter revenue numbers. Wipro that had guided for a revenue growth of -0.6 per cent to 1.6 per cent, managed to grow its US dollar revenue by 0.2 per cent. The company reported a revenue of $ 1.58 billion for the quarter, up 4.9 per cent year-on-year.

Joshi of CLSA said the current numbers showed that Wipro’s struggle with revenue growth continued. “The two-four per cent sequential dollar-growth guidance for the September 2013 quarter suggests some near-term momentum in line with the uptick across the industry.”

Margin performance, which is down by 20 basis points sequentially, has, however, disappointed. “Wipro’s claims of significant investments in sales and marketing in the last two years have so far not translated into results. While we appreciate that demand has not exactly been buoyant, Wipro’s current trajectory suggests that it will grow slower than industry growth rate (not just Tier-1 peers) for the third consecutive year,” Joshi said in the note.

T K Kurien, executive director and chief executive officer of Wipro said there was continued weakness in the demand environment due to delay in discretionary spending and also seasonal delay in the India and West Asia business, which impacted the first quarter numbers. However, Kurien attributed the bullish Q2 guidance to a better win rates in traditional business in the first quarter, which will start trickling in the second quarter. “We see the demand environment picking up post the first quarter. This is playing out in line with our expectations. We are seeing positive traction in the demand environment with discretionary spending turning in specific markets.” He added the US economy was showing signs of strong macroeconomic recovery.  

The Bangalore-based company reported a consolidated net profit of Rs 1,623 crore for the first quarter ended June 30 in rupee terms, up 11 per cent compared to the same quarter last year. Revenue of the group was up five per cent on a year-on-year comparison at Rs 9,735 crore.

The IT business, which contributes to about 78 per cent of the company, reported earnings before interest and tax (Ebit) at Rs 1,785 crore, up two per cent year-on-year. In rupee terms, the company’s IT services revenue grew seven per cent year-on-year at Rs 8,936 crore.

The company added 28 clients during the quarter. The IT services segment had 147,281 employees as of June 30, an increase of 1,469 people in the quarter. Kurien added large deal pipeline had increased over the several quarters.

The management also said the company’s focus on mining large account was paying out. “On the customer front, our focus on account management has made results with top 10 accounting 2.8 per cent sequentially. We have indicated in the previous quarter of our deepening 125 strategic accounts and they have delivered 1.5 per cent sequential growth. Our customer satisfaction metrics has witnessed growth and has grown 11 per cent year on year,” said Kurien.

Growth during quarter was driven by analytics and information management and consulting, which were up 6.5 per cent and 3.5 per cent, respectively on a sequential basis. In terms of market, India and West Asia proved top be a drag, which was down 6.7 per cent sequentially (-1.5 per cent on constant currency basis). However, unlike peers TCS and Infosys, which continued to see strong growth in the US, Wipro reported a drop of 0.7 per cent.

Suresh Senapaty, executive director and chief financial officer of Wipro, said the wage hikes for both onsite and offshore employees given in the first quarter had impacted the company’s operating margins in the quarter, which stood at 20 per cent against 21 per cent in the corresponding period last year.