Bangalore based company Wipro Limited (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 Limited (NSE:TCS), which has significant representation in Technology GEMS ETF (NYSEMKT:QGEM), and the second biggest Indian IT firm Infosys Ltd (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.