Nice numbers

Wipro's valuation is uncomfortably high under the current circumstances

Wipro has reported an extremely good set of numbers for the December quarter, but with the markets taking a tumble the stock fell almost 5 per cent on Wednesday.

One reason the markets would have disregarded the good results is that even after the correction the stock trades at around 30 times FY05 earnings, which is a huge premium to the other players in the sector.

Additionally, although revenue growth has been impressive this year, the company took a hit on margins (year-on-year), resulting in flat profit growth.

In the nine months till December 2003, Wipro's core IT services and products business (this includes the BPO business) grew revenues by 42.75 per cent, but the division's operating income grew just 1.28 per cent.

Things were better last quarter, when sequential growth in operating income (at 14.3 per cent) was higher than the 12.2 per cent growth in revenues.

Growth in profit would have been higher at almost 20 per cent, but for a 72 per cent drop in forex gains.

The revenue growth of over 12 per cent was on account of a 11 per cent sequential rise in the IT services business and a 29 per cent jump in the BPO business.

Offshore pricing increased 2 per cent, which was partly offset by a 2 per cent drop in average onsite billing rates.

This coupled with the impact of salary hikes taken earlier in the year led to a 30 basis points fall in gross margins.

However, a tight control on selling, general and administrative expenses led to a 40 basis points increase in PBDT margin.

The revenue guidance for the March quarter factors in a 7.6 per cent sequential rise. In fact, employee addition in the IT services division was at a record 1908 employees last quarter, which points to a strong expectation of demand.

Surprisingly though, the company added only 964 people to the BPO business, less than the over 1300 employees added in the September quarter.

With sequential revenue growth in double-digits in the previous two quarters, and margins beginning to stabilise, the outlook looks good for the company, which being one of the top three players in the industry will be among the largest beneficiary of the increased interest in IT offshoring. But the valuations of around 30 times FY05 earnings are uncomfortably high for the current volatile market.

Indian Rayon's mixed bag

Indian Rayon's Q3 FY04 results are a mixed bag. While the carbon black, textiles and Madura garments division saw increased sales, its rayon division faced stiff competition from cheaper imports from China.

Thus, while Indian Rayon's net sales grew 11 per cent to Rs 411.23 crore for the quarter ended December 03, its net profit declined by 5 lakh to Rs 28.56 crore.

Analysts point out that one concern for the company is rising costs. In the case of the textiles division, which constitutes 25 per cent of net sales of the company, there were increases in the prices of key raw materials like wool.

And these rising costs could not be passed fully on to the consumer, thus bringing weak price realisations for the textile division.

This helps to explain the 13 per cent jump in raw material costs for the company at Rs 192.59 crore in Q3 FY04.

Also while operating profits moved up very marginally to Rs 62.17 crore in Q3FY04, operating profit margins dropped 1.4 percentage points to 15.11 per cent.

Going forward, the company is expected to improve its performance in the next few quarters. The carbon black division is expected to show an improved performance riding on the back of a continued surge in the automobile and tyre segment.

Also with multinational chains like Wal Mart planning greater purchases of clothing from India, the company's export base could expand.

On the domestic front, the company would also benefit from the current retailing boom through an expansion in the availability of its Louis Philippe and Van Heusen range of shirts, coupled with renewed thrust on retailing its linen fabric product line.

Also the rayon division is expected to do better, with Indian Rayon planning capital expenditure of Rs 70 crore, in a bid to widen the product portfolio and bring costs down to levels comparable with those of its competitors in neighbouring countries.

With contributions from Mobis Philipose and Amriteshwar Mathur