Wipro Ltd — the soaps to IT major — reported an 18 per cent net profit growth in the third quarter ending December 31, 2008 but said it expects revenues in dollar terms from its software services business to decline sequentially in the fourth quarter. Software services account for 70 per cent of Wipro's revenues.
The company's consolidated net profit after taxes in rupee terms (Indian GAAP) touched Rs 1,004 crore in the December quarter from Rs 854 crore posted in the comparable quarter of the previous year. Consolidated revenues year-on-year increased 25 per cent to Rs 6,618 crore from Rs 5,303 crore a year earlier.
On a quarter-on-quarter (sequential) basis, its net profit rose by 2.65 per cent from Rs 978 crore earlier. Revenues rose a mere 1.7 per cent sequentially from Rs 6,507 crore in the September quarter. This was despite the rupee falling almost 11 per cent against the US dollar.
India's third largest software exporter by revenue added 31 new customers in the third quarter, but also said it has fewer clients and employees than the previous quarter. The company also saw a sharp drop in the number of its new hires, reflecting concerns that it may get fewer outsourcing deals. The company had 96,965 employees on its rolls at the end of the December quarter from 97,552 employees in the second quarter. The company says it currently has cash and cash equivalents of Rs 5,830 crore.
The results, however, did not impress the markets and the stock fell by 3.6 per cent to close at Rs 219.75 on the Bombay Stock Exchange today. Analysts say Wipro’s sequential deceleration will continue even in the next quarter when its bottom-line is expected to fall further by six to seven percentage points.
Wipro earns 60 per cent of its revenues from the US market. In rupee terms, revenue from IT services was Rs 5,079 crore, a year-on-year growth of 31 per cent, accounting for 77 per cent of revenues and 93 per cent of profit before taxes. However, the company delivered just 7 per cent sequential growth in IT services revenues from Rs 4,750 crore in September. Chairman Azim Premji attempted to sooth flagging sentiments on the weak sequential growth figures by saying, "Recessions do not last, resilient companies do."
On the dollar front, Wipro's IT services revenue was $1,100 million — a sequential decline of 0.9 per cent. The IT products business at Rs 837 crore, recorded 25 per cent year-on-year growth in revenues.
| HOW THE IT MAJORS STACK UP IN Q3 | |||||
| Revenue (in %) | PAT (in %) | Forex loss (Rs crore) | |||
| Y-O-Y | Q-O-Q | Y-O-Y | Q-O-Q | ||
| TCS | 24.13 | 4.65 | 2.68 | 7.10 | 251 |
| Infosys | 35.50 | 6.80 | 33.30 | 14.60 | 218 |
| * Wipro | 31.00 | 6.90 | 26.00 | 4.90 | 330 |
| (Indian GAAP figures) * Wipro’s numbers refer to its IT services business. The company does not give PAT figures for its IT services business. Hence the PBIT figures are given. | |||||
Currency volatility badly hit the revenue and net profit figures of TCS too. This was primarily because the company deals with other currencies like Euro, British Pound — both of which fell against the US dollar and decreased its earnings.
Also Read
Infosys’ revenue performance was better in dollar terms (US GAAP) though. Its Q3 revenue rose 8 per cent YoY, but fell 3.7 per cent Q-o-Q. The IT bellwether, however, lowered its revenue forecast in dollar terms for fiscal 2009 while it marginally upped its revenue forecast in rupee terms for FY09.
Vinu B Kartha, partner in Research and Advisory firm Tholons, said, "The December quarter was the slowest for the large players but they are expected to survive the next quarter also. It will be a serious problem when their top-lines get hit in the April-June quarter this year."
Other metrics
For the quarter ending March 31, 2009, Wipro expects revenue from the IT services business, including newly acquired Citi Technology Services, to be approximately $1,045 million. The TCS management had said that revenues from the Citi arm (whose acquistion it has completed) would be reflected in its books from the fourth (next) quarter.
Operating profit before interest and taxation for the IT services business increased 26 per cent year-on-year to Rs 1,045 crore in the December quarter from Rs 832 crore a year earlier. Sequentially, operating profit increased 5 per cent from Rs 995 crore in the September quarter. Inclusive of IT products and Consumer & Lighting, the total operating profit increased 19 per cent to touch Rs 1,125 crore from Rs 943 crore a year earlier (Rs 1,106 crore in September).
The company improved its offshore mix and significantly increased its mix of revenues from fixed price projects, according to Suresh Senapaty, Wipro CFO. He said the management had provisioned for losses from Nortel, and this had led to margins being impacted. Wipro's IT services business managed margins of 20.6 per cent in December from 21 per cent in the previous quarter.
Meanwhile, infrastructure services, both technology integration and managed services business, continued to be a key growth driver in India and West Asia. Wins in this vertical included contracts from Corporation Bank, Indus Towers, MTNL STPI IT services Ltd and UAE-based NMC Group, UAE. The region also saw good wins in the consulting space with an order from the government of Bahrain for an e-governance project and from Al-Dar group of Abu Dhabi.
The Wipro Consumer Care and Lighting business revenues grew 21 per cent annually. Chairman Premji's favourite pick, Santoor soap, recorded 21 per cent annual growth and brought in revenues of Rs 527 crore. Santoor sales increased 27 per cent in the current quarter. It's all-India market share in value terms grew to 8.1 per cent in the December quarter.
Analyst reactions
Form cautiously optimist, to "we have not seen the ground yet" sets the tone for the performance of the top three IT firms and what to expect in the net quarters.
Cross-currency fluctuation, worsening global environment, slow ramp-ups and margin pressure has clearly impacted the third quarter results of the top three IT firms. Traditionally the third quarter for the IT firm is slow due to additional holidays, analysts expect that the fourth quarter (January-March) would be all the more difficult.
"The third quarter was still on expected line but the next quarter is surely difficult. Some of the challenges that these firms will have to face other than forex are volume, even under constant currency we see de-growth. Eventhough budgets are likely to get finalised by February, these can always get changed at the last minute," said an analysts of a leading brokerage firm.
While Infosys set the tone for the quarter by revising its annual revenue guidance, Tata Consultancy Services (TCS) accepted that the next quarter could see a de-growth. And with Wipro revising its guidance for the next quarter by 5 per cent on sequential basis, shows the demand pressures.
Analysts and brokerage house continue to be under-weight for the sector. Says a CLSA report: "While Infosys lowered constant currency outlook but was still the best of the lot, TCS missed on many fronts (revenue, Ebit, net profits) and management comments turned decisively more bearish, and Wipro had an in-line third quarter but the worst outlook for the future. Not an encouraging picture for the space overall. Under-weight on the sector stays."
"Well most of the results were in line but Wipro's outlook was the worst. A couple of things going ahead are that everybody is talking about pressure on volume and margins, that IT budgets are not sacrosanct and there will be huge focus on cost management," said a research analysts from Motilal Oswal.
He further added, "The reason why we are saying the IT budgets will not be sacrosanct, as they will be revisited every quarter by customers depending on the business environment. However, a positive thing for the IT firms is that while globally business are collapsing but these firms have still managed to grow. That itself is commendable."
"In terms of performance, TCS did relatively better as it has focused on cost management and has held on to its margins. While Infosys did lose as their pricing fell by 1.8 per cent. Next quarter will be a challenge," said another analyst.