Wipro: Same old story

Rupee rise has once again played spoilsport with margins

Wipro’s performance in the June 2007 quarter was below analyst expectations and it led to the stock remaining more or less flat at Rs 505 on Thursday, in contrast to the bullish sentiment on the Street.

Like other software companies, Wipro too has seen business growth in dollar terms, but the rupee appreciation has impacted margins by 340 basis points q-o-q in the last quarter, but operating margins fell only 240 basis points sequentially to 20.7 per cent in Q1 FY08, helped by a 630 basis points q-o-q growth in IT services utilisation.

TCS’ operating margin fell 280 basis points q-o-q to 25.5 per cent in Q1 FY08, while Infosys’ OPM declined 300 basis points q-o-q. Wipro’s global IT revenues grew 5.1 per cent q-o-q to $726.1 million in the last quarter, but in rupee terms, its IT services revenues declined 0.93 per cent, while BPO revenues declined 2.6 per cent. Infosys’ top line was flat in rupee terms over the previous quarter, while TCS posted a 1 per cent q-o-q growth.

Wipro’s blended price realisations were below its peers - they were broadly flat in the last quarter despite contribution from offshore remaining steady at 44.8 per cent. In contrast, Infosys’s blended realisations grew 1 per cent q-o-q in the last quarter and that of TCS improved 0.6 per cent.

Going forward, Wipro management highlighted salary hikes for its offshore staff in mid Q2 FY08, which could hit operating margins by 150 basis points.

However, the company has forecast a robust 7 per cent q-o-q growth in dollar terms for its global IT revenues for the September 2007 quarter, coupled with management expressing optimism for better price realisations across its verticals, via a focus on improving billing rates.

The company is working on 10-12 large deals of over $50 million. The stock trades at about 21 times estimated FY08 earnings, and though it is likely to trade at a discount to Infosys and TCS (estimated FY08 P/Es of 24-25), most of the negatives seem factored in.


ACC: Concrete numbers

ACC was able to get better realisations on a per tonne basis on a y-o-y basis in the June 2007 quarter, coupled with higher despatch levels, which boosted revenues. However, a rising operational cost structure put pressure on operating margins in the last quarter.

As a result, the standalone operating profit grew 16.1 per cent y-o-y to Rs 544.4 crore in the last quarter, while net sales expanded 27.2 per cent to Rs 1867.9 crore. Operating profit margin declined 280 basis points y-o-y to 29.1 per cent in Q2 CY07.

The pressure on operating margins in the last quarter was owing to other expenditure as a percentage of net sales rising 310 basis points y-o-y to 21 per cent.

In contrast, in the March 2007 quarter, operating profit margin had improved 600 basis points y-o-y to 30.3 per cent. A bullish sentiment on the Street helped the stock rise 2 per cent to Rs 1156 on Thursday.

Meanwhile, the company’s despatches were 5.26 million tonne in the June 2007 quarter compared with 4.74 million tonne a year earlier. Also, realisations were estimated at Rs 3416.5 per tonne in Q2 CY07, a growth of 13.6 per cent y-o-y. The company’s realisations were estimated at Rs 3,317 a tonne in Q1 CY07.

Cement prices are expected to move up over the next few quarters, given signs of a leeway by the government to allow hikes in cement prices. The stock trades at 18 times estimated CY07 earnings.


Larsen & Toubro: Sound engineering

It was yet another quarter of solid growth at Larsen & Toubro as the infrastructure story remains intact. The company reported a 30 per cent y-o-y top line growth to Rs 4506 crore in its operational income and the operating profit was up a huge 74 per cent.

Exchange gains on foreign currency borrowings played a key role in its other income rising 220 per cent, and as a result the company posted a 140 per cent increase in net profit.

Without the exceptional item, net profit grew 57 per cent y-o-y. With such numbers, it is no surprise to see the Larsen & Toubro stock has appreciated 135 per cent over the past year.

Larsen & Toubro has managed to control costs better and, as a result, operating margin has improved by 240 basis points y-o-y to 9.4 per cent. The revenue growth was good across all its divisions.

Margins in the machinery and industrial products segment improved by 400 basis points y-o-y owing to better volumes and pricing as well as operational efficiencies. However, margins in electrical and electronics segment fell 135 basis points.

The engineering and construction order book is up 12 per cent sequentially to Rs 39,690 crore. New orders are up 32 per cent, and the momentum in construction and engineering is likely to result in robust financials for the next few quarters. The L&T stock trades at 29 times estimated FY08 earnings, but can continue to outperform.