Salary hikes likely to impact operating margins of Wipro

Wipro's management seems to have finally done away with the word ‘caution’. The country’s third largest IT exporter reported a robust quarter

to December 2009 fuelled by higher utilisation and better business volumes on similar lines to its closest peers TCS and Infosys.

However, what set its results apart from those of TCS and Infosys is a strong sense of future business momentum. Wipro said that it expects dollar revenue to grow by as much as 5% sequentially in the next quarter given the growth across most of its business verticals.

In sharp contrast, Infosys guided for a marginal 1.5% sales growth on the higher side of estimates. TCS, which does not offer guidance, continued to caution against a slower pick-up in demand. This is despite a strong sequential growth of over 7% in dollar sales from both the players in the quarter to December.

Wipro’s confidence stands out in the backdrop of the cautious approach adopted by its peers. But this is not much of a surprise considering the company’s investments in Europe, Middle East and India. These markets have grown exceptionally well for Wipro over the past two quarters.

For instance, Wipro has seen a 4.6% sequential growth in its business from UK, Germany, France, and the rest of continental Europe during the third quarter. In sharp contrast, its peers continued to witness a sluggish demand in this region. Also, Wipro’s Indian operations have grown by a strong 17% during the quarter on account of new orders across various verticals including telecom, banking and finance (BFSI), media, government, and defence.

The management has hinted that the good performance would continue in future as well given the rising order pipeline on account of new project rollouts by clients. Other verticals including healthcare, manufacturing and telecom are also showing renewed traction.

Another plus for Wipro is the efficiency with which it has managed its employee resources. It has been able to bill 80% of its resources in the December quarter, higher than Infosys (69%), and TCS (77%). This can be attributed to its initiative to reduce dependence of its revenue growth on employee additions.

In the next quarter, Wipro may show a little contraction in operating margin since salary increments are on the agenda. The company is currently trading at an FY10 estimated P/E of 23. Though analysts have cited a positive outlook for the top IT pack in FY11, current valuations leave little room for further appreciation in stock prices.