Wipro's Q2 profits strenghten company confidence

Wipro’s second quarter performance and its upbeat guidance for the next quarter confirm the positive vibes given out earlier by its peers, TCS
and Infosys. The demand recovery seems to be in sight and the top IT deck is well poised to take the advantage.

Wipro, the country’s third-largest IT exporter, surprised analysts with a strong 8% sequential jump in net sales at Rs 6,893 crore (Indian GAAP) backed by better project management and cross currency benefits. Net profit shot up 14% to Rs 1,162 crore.

Also, in dollar terms, Wipro was able to reverse the falling trend in revenue seen since the March 2009 quarter. Its September quarter revenue rose 3% to $1,065 million over the previous quarter. Wipro’s stock ended 2% higher at Rs 604 on Tuesday even though the broader market witnessed heavy selling.

What has cheered investors is the management’s confidence to keep the tempo high in the coming quarters. According to the dollar revenue guidance for the December 2009 quarter, the management expects to either maintain the sequential revenue growth rate or even better it to 4.5%. Moreover, this growth is likely to come without sacrificing profit margins.

Similar to its bigger peers, Wipro has seen a revival in willingness of clients to spend on IT services across verticals and geographies. This is captured by the fact that it has reported increase in request for proposals (RFPs) for projects, including those with discretionary work targeted to improve efficiency.

A major aspect wherein Wipro stands to gain more than its peers is opportunity in the domestic market. It has been catering to the Indian government and private sector clients for a long time through its subsidiary, Wipro Infotech. Today, Indian clients account for one-fourth of Wipro’s revenue, way higher compared with 7-9% for TCS and just over 1% for Infosys.

In the domestic market, so far Wipro has won long-term, high-value contracts in verticals, including telecom, infrastructure and e-governance. Wipro’s maturity in the fast-growing domestic market attracts higher significance given that it competes head-on with multinationals such as IBM and HP.

Establishing presence in such a highly competitive domestic market may not be easy for its Indian peers, who are late-comers to the party. Moreover, Wipro’s management has cited that margins in the domestic business are comparable to those in the international market and thus, would not dilute profitability in the long run.

Given this, it would be no surprise if investors offer a higher rating to Wipro’s stock in times to come. At the current level, it is valued at 21 times its trailing 12-month net profit, a notch lower than Infy’s P/E of 21.8.