Wipro More Cautious on 2013 Than TCS and Infosys

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Bangalore based company Wipro (NYSE: WIT), one of the leading firms in India’s powerful IT sector has posted mixed results for its previous quarter. Although quarterly earnings beat analysts’ estimates, the outlook is weak as sales from its outsourcing services division for the current quarter ending March 2013 will most likely remain flat, or in the best case scenario, increase by 3% from the previous quarter.  Following the announcement, the company’s shares on the Bombay Stock Exchange slid by 6% in early hours of trading. 

Wipro’s quarterly net income increased by 17.9% to $317 million (Rs 17.16 billion), about $15 million more than analysts’ estimates, while sales increased by 10% from last year’s $2.05 billion (Rs 109.89 billion).  Out of the total revenues, $1.58 billion have come from its outsourcing services unit, which forms the backbone of the company. For its final fiscal quarter of FY 2013 ending in March, Wipro expects these revenues to increase to the range of $1.585-$1.625 billion. Operating margins at this unit have increased slightly from 20.7% in Q2 ending September 2012 to 20.8% in Q3 ending December 2012. 

Wipro’s main competitors; the market leader Tata Consultancy Services (TCS), which has significant representation in Technology GEMS ETF (NYSEMKT: QGEM), and the second biggest Indian IT firm Infosys (NYSE: INFY) have also posted strong results for their respective quarters, beating analysts’ estimates; but unlike Wipro, the other two are more optimistic about the future. Overall growth in the outsourcing services market remains modest at best. TCS has the competitive advantage due to its flexible pricing policies while Infosys’s earnings got a boost from its acquisition of the Zürich based management consultancy firm Lodestone for $349 million in September 2012. I have discussed Infosys and its current growth strategy in more detail in this previous article

However, TCS and Infosys have not convinced Azim Premji, Wipro’s Chairman who believes that “the overall mood on economic growth continues to be muted." Then again, Wipro relies heavily on the telecom, technology and manufacturing sectors and has already witnessed an extremely challenging period of growth following the global financial crisis. In the two years since the beginning of 2010 till the end of 2011, Wipro’s stock at India’s National Stock Exchange (NSE) fell by 1.4%. In the same period, TCS’s shares rose by 58.5%. 

Wipro’s outsourcing division is not struggling anymore and is posting increasing sales. This is a big positive that has come after Wipro restructured its core operations in 2011. Growth for India’s outsourcing companies in the last couple of years has remained challenging due to an economic slowdown in the U.S and Europe. The two markets contribute about 75% of total sales to India’s $100 billion IT outsourcing sector. 

The uncertain economic environment in the West coming from the fiscal cliff, debt ceiling and European debt crisis caused several leading clients of TCS, Infosys and Wipro to cut back on their IT spending in 2012. Research firm Gartner estimated that IT expenditure registered modest growth of just 1.8% in 2012, but it is likely to almost triple to 5.2% in 2013. On the other hand, other industry experts have identified that real growth will most likely start occurring beginning in the final quarter of 2013; before that, things will remain challenging.

In other words, while the long term outlook for Indian IT firms remains positive, particularly because India’s IT sector enjoys a cost advantage that it’s European or American rivals do not have, the midterm will be tough. Recent macro-economic data from the U.S. and rapidly rising commodity prices will weigh heavily on the U.S. economy as 2013 rolls on.  Europe will continue to limp along now that the euro is strong enough to limit the rise in energy costs, allowing the weaker members of the Euro-zone to stabilize their economies while still receiving some support from the ECB, if only indirectly.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>Wipro</p> </td> <td> <p>Infosys</p> </td> <td> <p>TCS*</p> </td> <td> <p>QGEM</p> </td> </tr> <tr> <td> <p>Stock 6M</p> </td> <td> <p>19.32%</p> </td> <td> <p>31.88%</p> </td> <td> <p>9.33%</p> </td> <td> <p>16.71%</p> </td> </tr> <tr> <td> <p>P/E</p> </td> <td> <p>19.29</p> </td> <td> <p>17.12</p> </td> <td> <p>19.98</p> </td> <td> <p>15</p> </td> </tr> <tr> <td> <p>EPS</p> </td> <td> <p>0.49</p> </td> <td> <p>3.05</p> </td> <td> <p>1.26**</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p>Yield</p> </td> <td> <p>0.80%</p> </td> <td> <p>1.00%</p> </td> <td> <p>1.26%</p> </td> <td> <p>2.08%</p> </td> </tr> <tr> <td> <p>ROA</p> </td> <td> <p>9.53%</p> </td> <td> <p>16.76%</p> </td> <td> <p>23.23%</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p>ROE</p> </td> <td> <p>21.21%</p> </td> <td> <p>27.50%</p> </td> <td> <p>38.63%</p> </td> <td> <p>N/A</p> </td> </tr> </tbody> </table>

* Tata Consultancy Services Limited (NSE:TCS)
** US$1 = 53.89 Indian Rupees.

In the last six months, the ADRs of Wipro and Infosys have outperformed QGEM. TCS’s stock at the NSE has trailed behind its rival’s ADR but the company gives a competitive EPS, even in US dollar terms, and has delivered a significantly higher return on equity. TCS is the fourth biggest holding in QGEM. Besides TCS, QGEM also includes other firms in India’s IT sector, including Wipro and Infosys. The ETF allocates more than 75% of its funds to the technology sector of China and India. 



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