Wipro Limited (ADR) (WIT), Cognizant Technology Solutions Corp (CTSH): Should You Buy This IT Company?

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 Limited (ADR) (NYSE:WIT)’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 Limited (ADR) (NYSE:WIT)’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 Limited (ADR) (NYSE:WIT) is facing:

Pessimism in the Telecom sector and slow conversion of deals in pipeline hurting Wipro Limited (ADR) (NYSE:WIT)

The revenue from the telecom sector contributes about 14% to the total revenue of Wipro Limited (ADR) (NYSE:WIT). 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

Recently, the company acquired the C1 group of companies in Germany, which will help it gain market share in continental Europe.