Muted guidance

Wipro, Bangalore's other IT stalwart, has also unleashed a good set of numbers

Wipro has posted excellent results for the fourth quarter of FY 2004, proving once again that it has been able to offset the effect of a rising rupee and higher salaries.

Global IT services and products revenues increased by 9.4 per cent over the December quarter, and handsomely exceeded the company's guidance for the fourth quarter. Profits before interest and tax for global IT services and products rose 18.3 per cent sequentially.

The really good news was that in spite of the challenges faced, global IT products and services continued to improve operating margins, which moved up to 24 per cent, an increase of 2 percentage points over Q3 and 3 percentage points over Q2. Thirty-five new clients were added in the March quarter, compared to 24 in the previous quarter.

The improvement in operating margins was the result of three factors""higher realisations, a more favourable offsite/onsite mix, and control over selling, general and administrative expenses.

Although billing rates improved by 3 per cent, the Wipro management pointed out that around 2.5 per cent of that was on account of a better business mix, and only around 0.5 per cent was on account of price increases.

Margins are expected to be stable going forward, with aggressive hedging, better business mix and cost containment offsetting the impact of a rising rupee and higher salaries.

Understandably, however, there is some caution on pricing going forward, with the management maintaining that while overall billing rates would be stable, it remained to be seen whether there would be a further improvement.

The revenue growth during the quarter has occurred in all geographies "" US, Europe and Japan "" and in the telecom and utilities verticals. However, the rate of growth seems to have slowed down for the BPO business and in the financial services and retail verticals.

That's because of a one-time revenue growth in the December quarter on account of projects related to the holiday season. Attrition rates are definitely a cause for concern in the BPO business, although the management point out that part of the high attrition was due to the one-time project which was wound up.

Significantly, the attrition continues in spite of higher salaries, and is an industry-wide problem. The company is also considering the issue of a new instrument "" the restricted stock unit "" to employees in lieu of stock options.

Going forward, the company's revenue guidance implies a 6 per cent growth for the current quarter. That's lower than the double digit growth rates notched up in recent quarters, and implies a cautious outlook.

The company believes that growth in BPO could be slightly muted due to the outsourcing backlash till the US elections. Maybe that is the reason why, in spite of a special dividend, a bonus issue and with the Q4 results comfortably beating analysts' expectations, the stock moved up merely 1.7 per cent on Friday.

Upturn aids Gujarat Ambuja

Gujarat Ambuja Cements has reported a 86 per cent growth in its Q3 FY04 net profits (excluding other income). Other income in the last quarter tripled to Rs 33.34 crore primarily due to foreign exchange gains.

The company has benefited from an upturn in the cement industry "" production has grown but more importantly price realisations have grown by around 10 per cent year-on-year.

Said an analyst at a domestic brokerage firm, " the cement sector witnessed an upturn only in Q1 CY04, as certain key consuming areas had a slightly longer monsoon, thereby delaying the surge in construction activity usually witnessed at the end of the rainy season."

Along with an improvement in the operating environment, the company has kept a strict control on its costs ""- at a time when key raw material costs like coal have risen by around 18 per cent in international markets in the first quarter of 2004.

As a result, fuel and power costs have increased only marginally to Rs 114.91 crore in Q3FY04""it is apparent that a hedging policy has made this possible. Hence, operating profit margins in Q3FY04 rose 413 basis points to 32.6 per cent and operating profit rose 35.8 per cent to Rs 182.27 crore.

Going forward, Gujarat Ambuja is well positioned to take advantage of improving demand conditions in the key northern market "" the demand - supply gap in this market is expected to narrow considerably by September-October 2004, primarily due to rapidly growing demand and absence of any major capacity expansion in that region.

And with this region accounting for approximately 35 per cent of Gujarat Ambuja's cement despatches, an upturn in prices in the north should translate into a healthier bottomline for the company.

Also with the government planning to implement several large infrastructure and road projects, it should ensure demand for cement remains strong.

On the bourses, the Q3 FY04 results were in line with analysts' expectations, and the stock ended almost unchanged on Friday at Rs 330.

With contributions from Amriteshwar Mathur