Wipro stays true to forecast, hikes September guidance

Wipro’s performance in the June 2009 quarter was good, with revenues falling between the range it had given in April 2009. The stock markets, however, seemed to have bargained for more, as the stock is down about 2%. Measured in constant currency terms, IT companies have reported modest performances in the June 2009 quarter, but when you translate them from currencies like pounds, euros and Australian dollars to USD and then to rupees, the effect can be quite significant.

Wipro’s IT Services revenues for example show a decline of 3.1% in USD terms in June 2009, over the previous year, but a growth of 2.1% in constant currency terms and a growth of 10% in rupee terms. The latter is because of the rupee depreciating against the dollar in this period. Wipro has sounded a slightly optimistic note for the September 2009 quarter.

The company has three main business lines: IT Services, IT products and Consumer, of which IT services contributes more than three-fourth to revenues.

Wipro’s software division’s sales rose by 10% to Rs 4,825 crore in the June 2009 quarter, compared to the previous corresponding period. The depreciation of the rupee played a key role in this growth. In dollar terms, sales declined by 3.1% during the same period and by 1.3% over the March 2009 quarter.

The company also gives revenues in constant currency terms, which gives investors an idea of the core growth of the business. Sales grew by 2.1% over the June 2008 quarter to $1.01bn but declined by 3% over the previous period. Its guidance was $1bn-$1.03bn.

The company has forecast revenues for the September 2009 quarter, of $1.04bn to $1.05bn, based on constant currency rates. That indicates a sequential growth of 2% at the lower end of the range.

The guidance indicates some recovery in the market, as also evident in the statement by Azim Premji, chairman, Wipro, accompanying the guidance: “We are starting to see the first signs of stability in the business as ramp downs start to taper off and volume start to stabilise.”

In the other businesses, IT product sales grew by 2% to Rs 760 crore while consumer care and lighting sales grew by 7% to Rs 546 crore.

We have used Wipro’s Indian GAAP financials only for the analysis, from here onwards, except where mentioned financials are for the whole entity, that is including consumer lighting and IT products. Comparison is with the June 2008 quarter unless mentioned differently.

The company’s segment profit margin for IT Services improved by 150 basis points to 22.3% and overall segment profit margin improved by 140 basis points to 18.5%.

What helped margins to improve, in an environment when billing rates are under pressure? Wipro kept its total cost of sales and services under check; it grew by just 3% in the quarter compared to 5% sales growth. Travel costs were cut while raw material costs were flat, negating a 7% jump in employee costs.

Wipro’s total employee cost rose by 7.4% during the June 2009 quarter. Wipro treats employee costs under three heads, apart from including it in the cost of sales and services, it is also included in selling and marketing expenses and general and administrative expenses. Wipro seems to have chosen to retain its incentives and performance-based payouts, with compensation stagnating only for employees under selling and marketing.

The company’s operating profit margin improved by about 120 basis points to 20%. If operating margins have improved, despite employee costs rising, it is because of other areas. Travel costs have been slashed sharply (Communication costs have moved up, however. Has video-conferencing replaced physical meetings?). Raw material costs remained stable, as key input costs for its consumer businesses came under check. And, sub-contracting costs were kept under check. Miscellaneous expenditure has been cut sharply too.

Other income was negative during the quarter, due to foreign exchange differences. Other income was a loss of Rs 33.9 crore compared to a profit of Rs 50.6 crore. However, interest cost dropped to Rs 52.8 crore compared to Rs 77.5 crore.

Its profit before tax increased by 14% to Rs 1198.3 crore and net profit was up by 12% to Rs 1015.5 crore.

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