Second quarter guidance disappoints, but the big deals are back.
In the midst of all the noise surrounding performance of India’s top software services companies, Wipro’s commentary on the business environment makes far more sense than its quarterly numbers. The company has set the record straight by stating: “As IT budgets come under pressure, businesses are demanding more accountability and value from investments in IT.”
This is a paradigm shift in the outsourcing industry, which so far has only focused on cutting costs. It’s apparent that from here on the low-hanging fruits of labour and cost arbitrage are nearing an end. Companies that transition to the next level will survive.
For example, Wipro has won a multi-year engagement with a leading universal bank for modernising its core banking platform. This transformational program will enable the bank to launch new products quickly and go to the market faster. Indian IT is trying hard to go this way, which is why building vertial expertise has become mandatory.
Initial signs suggest restructuring is yielding results, as strong demand for discretionary IT has pushed growth in high-end services. Sequentially, analytics/information management and business application services grew 7.3 per cent and 2.9 per cent, respectively. No prizes for guessing, analytics has become one of the fastest growing services. On the other hand, application development maintenance (ADM) and BPO dipped 2.7 per cent and 4.6 per cent in the same period.
Given that Wipro undertook a major restructuring exercise some months ago, the market wasn’t expecting substantial revenue growth. The company’s combined IT services revenues stand at $1,408 million, a 0.5 per cent sequential increase and a 16.9 per cent year-o-year growth. Consolidated sales for the first quarter of FY12 stand at Rs 8,564 crore, up 2.7 per cent sequentially and 18 per cent annually. Onsite volume has grown 5.8 per cent quarter-on-quarter, while offshore volumes are up 0.2 per cent in the same period, leading to overall volume growth of 1.8 per cent sequentially.
The company’s net profit is down 3 per cent at Rs 1,334 crore, but it is in line with estimates. What has disappointed the Street is the guidance for the second quarter. The company expects combined IT services revenues to be between $1,436 million to $1,464 million, which implies a revenue growth between 2 per cent and 4 per cent sequentially. This is lower than the market’s expectations, which is why Wipro’s shares closed 4 per cent lower on Wednesday at Rs 398.60.
