Wipro: Muted response

Wipro's Q4 numbers failed to enthuse investors

Unlike Infosys and TCS, Wipro's Q4 results failed to enthuse investors as the stock declined 1.4 per cent on the BSE, that too on a day when the Sensex gained 2.7 per cent.

Though revenue growth and operating profit margin were more or less in line with analysts' expectations, investors were unhappy with its muted guidance of 3 per cent sequential revenue growth in global IT services for Q1 FY08.

Wipro's BPO business turned out to be exciting with 11.3 per cent sequential growth and 280 basis point margin improvement to 25 per cent.

However, in IT services, revenue growth was lower at 4.6 per cent q-o-q and 45 basis point erosion in margin to 23.3 per cent. The pressure on margin was due to the rupee appreciation (-30 basis points), onsite salary hikes effected in January 2007 (-50 basis points) and 19.3 per cent q-o-q increase in selling, general and marketing expenses, which pushed the margin lower by 80 basis points.

Despite these problems, Wipro could stanch the decline in operating profit margin thanks to better volumes and higher realisation. Volumes improved by 5.35 per cent q-o-q in IT services, while onsite realisation improved 2.2 per cent, and offshore realisation was 0.6 per cent higher. IT services utilisation was also higher by 100 basis points in IT services.

Wipro has made a slew of acquisitions in the past, which have all turned profit-making. The management also said that it is able to increase price by 3-5 per cent with new clients and also with some existing clients.

Analysts say that the enterprise business, comprising of enterprise solutions and financial services, will do well going forward. But the growth in product engineering services business is likely to be slower and impact margins""the contribution of this vertical in total revenues has declined from 29.1 per cent in Q1 FY07 to 26.5 per cent in Q4 FY07.

Analysts expect a lower earnings growth in Wipro as compared with TCS and Infosys for FY08. So compared with TCS and Infosys, which trade at 23 and 25 times estimated FY08 EPS, at a forward P/E of 22-23, Wipro appears expensive.

Ambuja Cements: Good show

Ambuja Cements (earlier Gujarat Ambuja Cements), like other players in the sector has reported an improved performance in the March 2007 quarter, thanks to strong price realisations and improved despatch levels on a y-o-y basis.

The company's operating profit grew 52.6 per cent y-o-y to Rs 563.1 crore in Q1 CY07, as compared to 33.4 per cent growth in net sales to Rs 1,433.8 crore. Its operating profit margin also improved 490 basis points y-o-y to 39.3 per cent in the last quarter.

The stock rose 1.76 per cent to Rs 115.45 on Friday. Earlier, ACC's operating profit margin also improved 600 basis points y-o-y to 30.3 per cent in the last quarter.

Ambuja's despatches grew 3 per cent y-o-y to 43.2 lakh tonne in the last quarter. Its realisations also improved an estimated 29.3 per cent y-o-y to Rs 3,316 per tonne in Q1 CY07. ACC too had grown its realisations by an estimated 26.8 per cent y-o-y in the last quarter.

Ambuja is expected to shortly complete the setting up of cement grinding units of one million tonne each at Farakka in West Bengal and Roorkee in Uttarakhand.

However, the underlying investor concern for cement stocks is the industry's earlier decision to hold prices for a year. The stock is fairly valued at 13 times estimated CY07 earnings.