Wipro

That both volumes and the pricing environment for Indian IT majors are set for downward pressure was apparent from the numbers of TCS and Infosys Technologies’ for the March quarter. But surprisingly, Wipro, the third in the ‘top three’ IT Services company has held on to its pricing, despite a turbulent macro environment.

Though volumes declined sharply at 6.3 per cent sequentially, the revenue decline at 1.1 per cent showed it fared better than peers. Wipro also managed to meet its guidance for the quarter. This fact has been treated by the markets with a fair degree of optimism.

But there are some key positives in the operating metrics, verticals and services offering, which may play out well for Wipro’s volumes over the next few years. That billing has not been significantly affected so far also means that there may be some leeway for the company on future price re-negotiations/discounts that clients may come back for.

At Rs 312, the stock trades at 12 times its likely 2009-10 earnings. At this valuation, and assuming that revenue and profits are likely to be under pressure over the next one year, there may not be scope for significant capital appreciation unless an investor has a two-three year horizon. Investors can, therefore, hold the stock, while betting on the fact that Wipro has the lowest exposure among IT majors to the troubled BFSI segment (26 per cent of revenues). Independent research bodies predict greater outsourcing in segments such as utilities, telecom and retail, where Wipro has a significant presence. It, thus, appears well-placed to tap opportunities ahead of peers.

This apart, increasing strength in winning domestic deals (partnering with Wipro Infotech) and benefits from the acquired Infocrossing operations, in the form of large deal wins in areas such as IT infrastructure outsourcing, are key positives for Wipro.
business metrics

Wipro has been able to increase the proportion of fixed-price contracts from 30 per cent levels at the start of FY-09 to 38.1 per cent in the latest March quarter. Fixed-price contracts ensure better realisations compared to time and material contracts. This also explains why billing was not under too much pressure last year. If the trend is sustained, some insulation can be had from imminent billing pressures. Clients may also prefer to structure contracts in this format for better manpower and resource utilisation within fixed timelines.

The offshore component of revenues has also increased steadily and is now 48.8 per cent. A greater offshore component means that costs are optimised for Wipro. While ramp up in utilisation has not been significant, this can largely be attributed to volume declines.

But Wipro does not plan to hire people to the extent that Infosys or TCS are set to do, suggesting that the company is looking to ramp-up utilisation levels. Hiring has been pegged to demand. A lower hiring level means that cost of bench is low. Of course, if the volumes in IT deals, especially large ones ($100 million plus) were to spike up, Wipro may face a challenge in recruiting several people and training them.

This apart, selling, general and administrative (SG&A) expenses and wage costs have been trimmed compared to last year. While the company has decided not to give any wage hikes this year, there may a marginal hike in SG&A for better mining of clients. Potential margin squeezers have, thus, been kept at bay.
Business prospects

Wipro has the lowest dependence on the BFSI segment among Tier-1 IT players. Manufacturing and healthcare (20.7 per cent of revenues), technology business (27.3 per cent of revenues, which includes telecom, media and technology) and retail and transportation (18.2 percent of revenues) all make for a well-diversified vertical-mix. A recent study by research firm TPI indicates that media, utilities, telecom and retail sectors are set to witness heightened increase in IT outsourcing as cost pressure builds on these firms.

Benefits also accrue to Wipro through its IT products arm — Wipro Infotech — especially in the domestic IT market. The nine-year deal entered into with Aircel last year at an estimated Rs 1,800-2,400 crore is a case in point.

Similarly, a Rs 1,182- crore worth contract has been won from the ESIC (Employees State Insurance Corporation). While Wipro Infotech may be the primary beneficiary of such deals, there will also be significant portions of such deals where Wipro’s expertise would come to play.

Infocrossing, the company Wipro acquired in 2007, has also started to contribute to deal wins. Infocrossing has been able to bag large deals ($100 million plus) to be executed over the course of the next few years. Being in the IT infrastructure outsourcing space, an area just beginning to catch up for Indian IT majors, Infocrossing could well be a shot in the arm for Wipro.
Risks

Pricing pressures may strain margins, while volumes could stutter over the next few quarters before witnessing an increase.

Top-client revenues and number of one-million dollar-plus annual revenues clients have slowed down as have the number of overall active clients. These facts are reflected in the volume decline. But as indicated earlier, the company could step up spends on SG&A for improved mining and ramp-up of existing and new clients.