Byzantine data

BS Compass

Deciphering Wipro's results, which has always been a tough task, has become even more complex thanks to the company's decision to consolidate the results of its IT enabled services segment with the results of its global IT services and products business.

Besides, there continues to be a considerable difference between the Indian and US GAAP numbers. This is another hindrance, because on the one hand the US GAAP numbers are more detailed, and on the other the company refers to Indian GAAP numbers in its conference call with analysts.

According to the US GAAP numbers, revenues of the global IT business rose around five per cent last quarter, although margin pressure led to a four per cent drop in gross profit and a 11 per cent fall in operating profit.

Under Indian GAAP, revenues of the global IT business grew 6.2 per cent, led by a 19.3 per cent jump in BPO revenues. There was 0.5 per cent drop in pricing for the BPO business, the growth being volume-led.

EBIT margins of the BPO business fell from 25 per cent in the March quarter to 23 per cent last quarter, both because of the drop in pricing and high recruitment which led to a higher bench.

The IT services business grew by 5.1 per cent, thanks to a volume growth of 6.4 per cent, which was offset by a 1.4 per cent drop in offshore pricing and a 2.6 per cent drop in onsite pricing.

Thankfully for the company, the impact on margins owing to lower realisations was made up for by an improvement in utilisation. However, higher SG&A (selling, general and administration) and a lower proportion of product sales contributed to a 240 basis points fall in EBIT margin.

The guidance for the September quarter factors in a revenue growth of around six per cent. The management has further added that, unless the rupee springs some negative surprise, its margins should be slightly higher in the September quarter.

But the expected margins next quarter and the revenue growth rates are nowhere close to those recorded by Infosys in the past few quarters. And despite this, Wipro continues to get a premium over Infosys, in terms of PE-based valuations.

While the main reason for this is the low floating stock for Wipro, there is also a view that the company's relatively aggressive acquisition strategy and broadly diversified service offering would lead to higher growth rates in the long-term.

For now, however, the acquisitions and the high exposure to areas such as technology are drag on both profitability and growth rates.

HDFC: growth despite stiff competition

Analysts continue to look in vain for signs of a slowdown at HDFC. The argument is that HDFC is losing market share, some of their main competitors charge lower rates, and, sooner or later, growth at the housing company will be affected. Well, it hasn't happened so far.

In fact, net interest income in Q1, FY 2004 has more than doubled, compared with the same period last year. Although growth in interest on loans has been a tepid 6.2 per cent, interest costs have actually fallen.

Profits on sales of investment have been higher by Rs 13 crore, but dividends, lease rentals, and income from investments are all lower. Profits after tax were up 22 per cent, above FY 2003's 19 per cent, and well above last quarter's growth rate of 15.9 per cent.

Gross margins have expanded. HDFC has been lowering its dependence on deposits, which have been an expensive source of funds, and deposits now constitute around 40 per cent of loan funds, compared with 49 per cent a year ago.

HDFC continues to show steady growth of around 30 per cent in sanctions and disbursements, despite increasing competition, and despite lower interest rates offered by competitors. Individual loan disbursements rose by 34 per cent, a tad lower than the 36 per cent growth in FY 2003.

The housing finance company has been able to protect its margins so far because it has been able to lower its cost of funds to offset the effect of lower growth in interest income, a strategy that has held it in good stead so far.

The HDFC management also points out that net interest margins are at around 2.15 per cent, while historically they have operated at lower spreads, implying that they would be comfortable even if spreads are compressed. But the stock is trading at a forward price-earnings ratio of around 12, high for what has now become a commodity business.

With contributions by Mobis Philipose