Should You Buy This IT Company?

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Wipro's (NYSE: WIT) financials have been under pressure in the past quarters, lagging on growth compared to its peers.

Although the improvement in Information Technology (IT) spending by the banks in North America will help the company increase its revenue in the coming quarter, I remain concerned about the slow addition of new clients in Wipro's portfolio.

Lets start with the positive.  IT spending by the banks in North America has been increasing in the last 2-3 quarters.  The Banking and Financial Services Industry (BFSI) being a major contributor to Wipro’s revenue, this increase will help the company stabilize its revenue in the coming quarter resulting in an improvement in both the top line and the bottom line. The company will also benefit from Rupee depreciation as it bills most of its revenues in U.S. Dollars while majority of the cost it incurs is in Indian Indians Rupees. Most of the companies in Indian IT sector are expected to benefit from above trends of Rupee depreciation and increased IT spending by banks. However, some of the positive impact from the above mentioned trends will get offset from the following headwinds which Wipro is facing:  

Pessimism in the Telecom sector and slow conversion of deals in pipeline hurting Wipro

The revenue from the telecom sector contributes about 14% to the total revenue of Wipro. The company reported a decline of 3.9% in revenue from this segment. Other worrying factor for the company is the slow conversion rate of the deals in pipeline.

A salary hike will further put pressure on the margin

Wipro has announced a salary hike for its employee from June. The company has the lowest operating margin as compared to its peers. This recent salary hike was unexpected and will further put pressure on operating margins.

Peer Analysis

Cognizant (NASDAQ: CTSH) recently announced its first  quarter Fiscal Year 2013 (FY13) results. The company has again produced strong quarterly results where its revenue increased by 18.1% quarter-over-quarter. The company has also given guidance for FY13 with its revenue expected to be up by 17% as compared to FY12. The Company has been investing in the emerging markets and Europe to diversify its revenue stream.

Recently, the company acquired the C1 group of companies in Germany, which will help it gain market share in continental Europe. Cognizant has also invested in new SMAC technologies which are expected to generate revenue of $500 million in FY13. The company is also building on its consultancy expertise to help its customers transform their businesses.

The immigration bill impacted Cognizant more than its competitors as it has the highest number of clients and employees on visa in the US. Cognizant has the lowest margin in comparison to its peers. So the bill will further put downward pressure on its margins.

Infosys’ (NYSE: INFY) share has seen an upward movement since announcing the return of Narayan Murthy as executive chairman. Recent quarters have been turbulent for Infosys as it continuously lagged behind its major competitors TCS and Cognizant on the growth front. Management’s guidance for FY13 is below the industry’s estimates.

Narayan Murthy has his task cut out to stop this downturn and move Infosys in the orbit of TCS and Cognizant. During the company's annual meeting he discussed  the future strategy of Infosys.

He discussed revamping the sales force team and providing them with more resources to clinch new clients. Infosys has also changed its strategy on pricing going forward. The company announced that it will have flexible pricing strategy to make it more competitive. The company also plana to increase its consultancy business services, which has higher margins than IT services. The return of Narayan Murthy, and his past success record will help Infosys to come back on track.

Company

P/S ratio

Op. Margin

1 yr. Fwd. P/E

Infosys

3.26

25.97%

13.50

Cognizant

2.50

18.41%

13.77

Wipro

2.59

18.06%

14.47

The operating margin for Wipro is low compared to its peers in the industry. The one year forward P/E is high compared to its peers. So the stock at the current price seems overvalued.

Conclusion:

Wipro has been lagging behind its peers since the recession. The company has made changes in leadership which were not quite successful. The company has been slow in deals conversion.

With the weak guidance provided by the management for FY13, and the salary hike will further pressure operating margins in the coming quarters, we believe the company will keep under-performing its peers over the next few quarter.

I recommend  you avoid this stock. 


Ash Sharma has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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