Impressive, but...

Wipro's year-on-year numbers are lowest among top-tier IT firms

Wipro's September quarter results are not very different from that of its peers, TCS and Infosys.

On the one hand, sequential (quarter-on-quarter) growth numbers are impressive, with revenues of the global IT services and products business rising 8.3 per cent and operating profit of the segment increasing 10.6 per cent, based on US GAAP segmental results.

Year-on-year growth numbers, on the other hand, are far from impressive. Although revenues of the division, which includes IT services and BPO businesses, grew by a healthy 26.6 per cent, operating profit grew just 12 per cent.

Thus far this financial year, that is in the six months till September, operating profit of key global IT services division has risen just 16.7 per cent.

Excluding gainsosses from forex fluctuations, growth in operating profit was just 13.3 per cent for the six months. The stock, for inexplicable reasons, trades at 29 times 12-month trailing earnings and 25.4 times FY06 earnings.

Operating profit margin (before other income and forex fluctuations) fell 300 basis points on a y-o-y basis in the six months.

The main culprit behind this was the BPO business, which is going through a transition under a new leadership and a new strategy. Operating margin of this business fell 1000 basis points y-o-y, which led to a 40 per cent drop in its profit.

It's not that the core IT services has fared very well. Operating margin of this business fell 228 basis points during the same period.

Of course, this segment has done much better relative to the BPO business, but an 18 per cent y-o-y growth in operating profit is nothing to write home about.

Since analysts continue to forecast an earnings growth of about 25 per cent for FY06, there's room for disappointment. Earnings in the December and March quarters would have to grow by 13 per cent q-o-q, on an average to achieve consensus estimates of about Rs 14.5 per share. That's a tall task for any company. More so for Wipro, which has given salary increases for its offshore employees effective October 1.

With operating profit growth as low as 13.3 per cent in the first six months (compared with 30 per cent for Infy and 20 per cent for TCS), it's surprising that Wipro trades at only a 7 per cent valuation discount to Infy.

Biocon

Biocon's profit in the September quarter was under pressure from both pricing pressure in the European statins market and higher input costs. Its profit before tax fell 13.3 per cent y-o-y to Rs 52 crore last quarter, although revenues increased 8.1 per cent. Manufacturing and other expenses rose 354 basis points as a percentage of sales, which led to a 345 basis points fall in EBITDA margin.

On a sequential basis, however, the company's performance was better. Its EBITDA grew 15.4 per cent quarter-on-quarter, indicating that the company's recent strategy of expanding beyond statins has shown signs of paying off.

The company's management said they have been attempting to combat the pricing pressure in the European statin market by expanding the contract research business and by increasing the proportion of insulin and allied products in the biopharmaceutical division.

EBITDA margins, as a result were more or less steady at June quarter levels of about 30 per cent. This, in fact, seems to have impressed the markets. The Biocon stock was almost unchanged at Rs 495 on Wednesday, on a day when BSE's Healthcare index fell 2.4 per cent.

Gujarat Ambuja

Gujarat Ambuja Cements has reported a 9.47 per cent fall in its operating profit to Rs 171.41 crore for the September quarter, which is not really surprising since even ACC had reported a similar drop.

The Gujarat Ambuja stock fell just 0.75 per cent on Wednesday, despite a 2.3 per cent fall in the Nifty, signifying that a drop in profit was largely expected.

Gujarat Ambuja's consolidated results are not strictly comparable, though, as Ambuja Cement India and its subsidiaries Ambuja Cement Eastern and Kakinada Cements have ceased to be subsidiaries of Gujarat Ambuja.

The company reported a 149 basis points drop in its operating profit margins to 25.3 per cent in the last quarter, largely owing to lower cement price realisations.

Average realisations dropped about 4 per cent to Rs 2,304 per tonne y-o-y last quarter, because of sluggish price conditions in Northern and Western markets.

In fact, Gujarat Ambuja fared better than ACC, whose operating margin fell 291 basis points to 14.73 per cent. Gujarat Ambuja, like other players in the sector, has also seen cement sales remain more or less flat on a y-o-y basis.

Sales were stagnant because of heavy rain in July and September in key markets of Maharashtra and Gujarat, as well as the transporters' strike in Himachal Pradesh. Like earlier quarters, a key highlight of the company's result was its tight check on operating costs.

For instance, power and fuel costs have declined about 4.95 per cent on a y-o-y basis, while freight and forwarding costs dropped 5.1 per cent.

The September quarter is being seen as only a hiccup and going forward, the company is expected to benefit from a pick-up in cement prices post-monsoon. However, the stock appears expensive at about 15.3 times estimated FY06 earnings.