Volume vault

BS Compass

There are a lot of positives in Wipro's September quarter numbers

Although Wipro refers to the Indian GAAP numbers in its communication with the media and investors, one would have to stick to the US GAAP numbers for a meaningful analysis of the core business.

Last quarter, Wipro's global IT business grew 11 per cent compared with the June quarter, driven by higher volumes in both the IT services and the BPO businesses.

The BPO business grew 21.8 per cent sequentially, with average realisations increasing 2.7 per cent.

The software services business saw a 10.8 per cent sequential jump in volumes, and although offshore realisations were flat, pricing in onsite projects rose 2.2 per cent.

In essence, volume growth was pretty impressive and the pressure on pricing has abated. Importantly, the Wipro management said that this trend would continue - its guidance for the December quarter puts revenue growth at over 8 per cent.

It has also said that operating margin will be maintained at the first-half levels of 21 per cent excluding any possible impact of the rupee on margins.

This is significant because the company just gave a 12 per cent (average) salary hike to its offshore employees, and this would amount to a 150 basis points hit on margins.

Even in the September quarter, the company had to do some cost control in order to maintain margins at the June quarter levels.

Gross margins fell 225 basis points mainly because of the appreciation in the rupee, and it was only because of a 4.1 per cent cut in SG&A (selling, general and administration) costs that operating margins were maintained at the June quarter levels.

Also, since the company had hedged a big chunk of its forex exposure, there were gains of Rs 12.32 crore as a result.

This led to a near 100 basis points jump in PBT margins - in percentage terms, PBT of the global IT business jumped 16.3 per cent.

The company's recent acquisition, Nervewire, posted a heavy loss of Rs 11.6 crore at the PBT level, and on a consolidated basis, PBT margins are impacted by almost 140 basis points as a result.

Analysts, however, don't see this as a cause for concern because this particular acquisition has helped the company increase its service offering for clients in the financial services space "" last quarter, revenues from this space grew 17 per cent.

Moreover, even the telecom vertical did well last quarter, and this uptrend is expected to continue.

Last year, Wipro was a laggard because of its exposure to the (then) beleaguered telecom sector, and since there are now signs that this has changed, the company can be expected to report healthy volume growth numbers even going forward.

In summary, there are positives galore in Wipro's results, and this is reflected in the three per cent jump in its share price, but investors need to be reminded that the stock now trades at 32 times estimated FY04 earnings.

Gujarat Ambuja

The weakness in cement prices last quarter is clearly reflected in Gujarat Ambuja's financial performance. Although volumes grew five per cent, the drop in realisations resulted in a stagnant topline. Much of the growth in volumes came from higher exports, which grew 30 per cent.

In fact, domestic offtake was flat at last year's levels. Operating margin fell 330 basis points to 17.5 per cent compared to the same period last year, because of a 20 per cent jump in staff costs and higher maintenance costs which led to a seven per cent increase in other expenses.

This was partly offset by a drop in power and fuel costs, which were lower by around 5 per cent at Rs 452 per tonne.

Gujarat Ambuja managed this despite an increase in the cost of imported coal. Close to half of the company's units run on imported coal, prices of which have gone up 7.5 per cent over the last year.

But some of the impact may be delayed because coal imports would be based on long-term contracts.

Debt reduction has helped GACL reduce its interest outgo by 11 per cent. And the company has the option of further reducing its debt by redeeming its foreign currency convertible bonds, since the rupee has appreciated.

The option to redeem the FCCBs commences in early 2004. But it is likely that the lenders may utilise the option to convert the FCCBs at a price of Rs 222.

GACL currently trades at Rs 231, and if the rally in the markets continues, the GACL stock wouldn't be far behind. Higher cement prices post-Diwali are expected to result in an improvement in performance next quarter.

With contributions from Mobis Philipose and Sameer Ranade