Infosys and Wipro: Whos the bellwether?

POUND WISE

Infosys has pipped Wipro to become the largest infotech company by market cap. Analysts point to Wipro's fledging acquisitions, slippage in growth and fears of the Nifty going free-float for the decline

Circa 1999: A news item appeared in a leading newspaper: The top three IT and media giants "� Wipro, Infosys and Zee Telefilms "� account for 7.5 per cent of India's GDP measured in terms of their market capitalisation. Wipro and Infosys account for 5.3 per cent of GDP.

GDP at current prices for 1998-99 was then Rs 17,70,000 crore. The market cap of the three giants as on December 23, 1999, was Rs 1,31,929 crore. Around December 1998, their market cap was a meagre Rs 7,567 crore and the GDP for 1997-98 was Rs 15,63,600 crore.

August 2003: The IT giants are a pale shadow of their former selves while Zee's market cap has been eroded substantially. Here is a shocker: the combined market cap of the three has shrunk to a measly Rs 49,241 crore.

The two facts mentioned here capture the sea change that has taken place in the market cap scenario. The change is more significant in relative terms for the two IT majors mentioned above.

Infosys at Rs 23,106.5 crore has edged out Wipro (Rs 21,506.25 crore) in terms of market cap and presently ranks fifth in the market cap rankings behind ONGC, Reliance, HLL and IOC. Wipro ranks seventh in the list behind Infosys and SBI.

Infosys and Wipro were the two companies that stood head and shoulders above the competition among IT companies. The two behemoths have also made their presence felt in the international IT scene through their global delivery model and quality service offerings.

However, along with market cap, there also seems to be a definite shift in loyalties, with a majority of analysts preferring Infosys to Wipro.

Why has this happened? Analysts cite two factors. First: Infosys upped its guidance and declared better results in the June quarter while Wipro's results were disappointing.

The latter's near-term profit has been impacted due to its recent acquisitions. It is expected that the acquired firms will take at least three to four years to turn profitable.

Second: The successful ADS offering of Infosys gives investors another exit route. The premium that the ADS commanded along with the cash inflow from it also augurs well for the company.

Nimesh Chandan, research analyst at brokerage and research firm Stratcap Securities explains, "If you look at the quarterly results, Infosys has shown consistent sequential growth which is missing in Wipro."

Analysts reckon that Infosys has also shown a distinct effort in moving up the value chain and has explored new lines of business while Wipro faces stagnation in growth.

"There could also be liquidity problems due to the low level of floating stock. The higher multiples that it trades in make incremental growth in stock price difficult," says Chandan.

Click to view: "How they performed in the last eight quarters"

In the June quarter of 2003, Infosys posted a 28.25 per cent increase in net profit to Rs 278.12 crore and a 41.51 per cent increase in total income to Rs 1,081.98 crore compared with the corresponding period last year.

Sequentially, net profit was up 7.38 per cent and income 6.09 per cent. The company's q-o-q revenue growth was higher at 7.7 per cent compared to its guidance of 6.1 per cent in dollar terms.

Wipro's Q1 consolidated net profit increased 5 per cent to Rs 100.781 crore over the same period last year. On a sequential basis, however, the net was down 4 per cent, below analysts' expectations of Rs 200.13 crore.

Wipro had got its share of flak after the results. "Margins have been consistently falling and the company has been trying to make up for this by way of acquisitions.

This, coupled with the company's decision to evaluate all critical acquisitions separately, leaves little clarity to the results," said an analyst with a leading brokerage.

Among Wipro's acquisitions, Nervewire made a Rs 10.5 crore loss in June 2003 and is expected to take two quarters to turn around while Spectramind registered a topline growth of 19 per cent. However, higher intake of people resulted in margins getting impacted.

Infosys has always been focused on IT services, whereas Wipro has a diversified presence in IT hardware, consumer care, lighting, and health sciences apart from IT services.

However, as far as IT services are concerned, both the companies have been able to make a swift move up the software value chain. Both have competitive advantage in the form of highly mature and evolved delivery models.

Both have, over the years, developed their onsite and offshore execution capabilities and delivered high quality, scalable services to their clients.

This was done with the help of substantial investments in infrastructure and systems. This, along with well integrated onsite and offshore services, helped them offer seamless, high quality solutions to their clients.

Analysts say Wipro's existing revenue stream is exposed to a larger risk than Infosys. This is because 36 per cent of its revenues are derived from the telecom research and development segment which provides services to equipment majors like Nortel, Cisco and Lucent.

Wipro's clients in this segment were the worst affected due to the technology meltdown globally and the revenues from this space have shown a decline of 3.1 per cent in FY03.

Thus, going forward, a significant part of Wipro's revenues will continue to face volatility as there is lack of clarity regarding the recovery of the global telecom industry.

In comparison, Infosys does not face this risk as it does not have a substantial presence in a single segment. Moreover, Infosys has developed a core banking solution (essentially a software product) which has found success in the domestic as well as international markets.

Therefore, topline growth for Infosys may be better compared to Wipro going forward as its core revenues seem more sustainable in the long term. However, analysts say volumes would be crucial for growth.

Reaffirms Maninder Gupta of SBI Caps, "There is a difference in the focus in both the companies due to the diversity in business models. Last year was a difficult one for telecom and IT and Wipro felt the effect due to its high level of exposure in them. Infosys had done well due to its exposure in the banking, financial services and insurance (BFSI) segment. Wipro has also made a venture in this domain, albeit a late one. As a result, it got stuck with low-end jobs."

Even when both the companies have been facing enormous pressure in recent times owing to the economic slowdown and MNC competition, Infosys has been able to maintain margins in a better way compared to Wipro.

But it is not to deny the strength and expertise that Wipro possesses. In recent times, Wipro has been able to attract larger-sized and longer-term contracts than Infosys, and this speaks a lot about the company's ability to successfully bid for large contracts abroad.

In June 2003, Wipro saw a 1.4-2.6 per cent q-o-q decline in offshore-onsite rates. The billing rates for Infosys declined by 1.9 per cent.

However, Infosys does not expect pricing to decline as sharply as it did in Q4. Most of its clients have gone through the first round of price negotiation. So while billing rate pressure is expected to continue in FY04, it is expected to be reduced in magnitude.

Looking ahead, while a majority of analysts bet on Infosys to perform better, Wipro does find a few backers. Maninder Gupta adds, "Both Wipro and Infosys had entered into package implementation at the same time. However, the growth rate of Wipro in the area has been consistently better than that of Infosys. Going forward, telecom and IT may grow at a faster rate than BFSI. The low level of floating stock would also ensure that valuations remain high." Analysts also say the long-term outlook would be better once the acquisitions turn profitable.

Moving on to valuations, while Infosys' valuations look reasonable despite margin pressures, Wipro's seem to be stretched. With Indian IT stocks trading at an average P/E of 18x their FY03 earnings, Wipro looks highly priced.

Another risk for Wipro is the low level of floating stock (around 16 per cent) that has consigned the stock to high volatility levels in the past. This may continue going forward. Analysts also feel that the scope for growth is low at higher valuations.

Analysts back Infosys citing its superior performance and efforts made to counter MNCs. However, Wipro scores in the BPO front, having taken on the well-entrenched Spectramind while Infosys' BPO unit Progeon is still in the fledgling stage.

The free-float factor also comes to play. Analysts are apprehensive that with the BSE embracing the free-float method, the probability of the NSE following suit is in sight.

The low level of floating stock in Wipro may adversely affect the stock when fund managers rebalance their portfolios to downsize their holdings in Wipro.