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Main disappointment was Wipro's muted guidance: Ankur Rudra

Puneet Wadhwa/Mumbai 24 Jul 12 | 11:45 AM
Related to : Wipro Ltd
 Wipro Ltd

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The markets gave a thumbs-down to the muted guidance from Wipro while announcing its June quarter results. Ankur Rudra, Vice-President, (IT Research), Ambit Capital tells Puneet Wadhwa that it could be a bumpy road ahead for the company in FY13. Edited excerpts:

Wipro announced its results earlier in the day today. What is your interpretation and key takeaway from the results? Are they in-line with your expectations?
The published results were broadly in-line with what we were expecting, starting with the revenue 1.4 per cent decline in the IT services revenue in US dollar terms. We were expecting a 1.9 per cent decline. So it was broadly in-line. We were expecting flat constant currency growth, which is what they have reported.

This was supported by flat volumes and cross currency. The margin expansion of only 30 basis points (bps) was again slightly disappointing, as we were expecting a 54 bps margin expansion. So, it was 24 bps below what we were expecting. As a result, the earnings came slightly below our expectations.

The main disappointment from the results was mainly in the guidance. We were expecting 2 – 4 per cent growth in the guidance for the next quarter and they have reported much lower than that.

What about the guidance, especially for IT services and the outlook for margins given the salary hike in the overall operating environment?
The guidance given is 0 – 2 per cent. We were expecting a guidance of 2 – 4 per cent for the second quarter. Without a growth of 3 – 4 per cent, it will be difficult for Wipro to do do 7 per cent plus growth for FY13. We were expecting 7.5 per cent growth for FY13. With the current guidance, the overall growth for FY13 looks difficult to achieve, and it will be difficult to cross 5 – 6 per cent.

Now that all IT heavyweights in terms of Infosys, TCS and Wipro are out with their numbers and respective guidance, what is your stock strategy regarding these three frontline stocks?
We have always maintained that our views on these three IT stocks are driven by their comparative positioning and clearly TCS maintains a much stronger comparative positioning to Infosys and Wipro.

We have been sellers on Infosys and Wipro and remain sellers on these two stocks and remain buyers on TCS because comparatively it is strongly positioned and this marries as well with our growth expectations from these three stocks. We expect stronger growth from TCS and weaker from Infosys and Wipro.

How much of a concern is a situation in Euro and the rupee levels? And are the current valuations of these IT heavyweights reflecting this?
I think the macro-economic challenges have been a part of the growth expectations for the industry from almost a year back now when the growth fears on US economy began. From that perspective I don't think that anything has inclemently worsened or improved over the last one year.

Customers for all these top tier Indian IT services firms factor into their expectation and therie spending. To that extent, the growth within the sector is driven more by the fact if the firms are positioned and focussed into the right growth areas or not. 

So what is your strategy regarding the mid-cap IT pack given these results and the way ahead, especially for companies in the mid-cap IT space?
In mid-caps, we have always preferred companies which had focus on niche verticals and service lines.

Can you name those companies that you are bullish on?
The companies we are bullish on are Persistent Systems and Polaris. Persistent is focussed on off-shore product development area and Polaris is on BSFI. Besides this, we are buyers on Info Edge and Redington India that are leaders in the respective area they operate in.

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