Wipro's decline in net profit goes beyond hike in wages

IT major Wipro's consolidated net profit for the given quarter declined by 6.7% to Rs 2,059 crore as against Rs 2,207.4 crorein the same period of last year.

The share price of the company took a beating on July 20 and dropped over 4% on BSE and NSE.

At 936 hours, shares of Wipro were trading at Rs 526.40 per share, down 4.16% and Rs 524.05, down Rs 25.35 per share on NSE and BSE, respectively. SEE LIVE. 

The company said that its consolidated net income rose to Rs 13,697.6 crore versus Rs 12,370.6 crore.

The Azim Premji-led firm attributed the fall in margins and effectively net profit to wage hikes and headwinds in its India and Middle-East business.

Wipro CEO and Member of the Board, Abidali Z Neemuchwala said the company has given "healthy salary increase" to its employees. "We are focussed on building a sustainable business model. We have completed the restructuring of our consulting business and we are working on restructuring our India and Middle-East business model," he added. Apart from this he also said that acquisition-related items resulted in the decline in net profits.

Its expenses for the quarter rose to Rs 11,412.9 crore as against Rs 9,972.2 crore in the corresponding quarter of last year.

"IT services margin (17.8%) reflects the investments in rewarding employees and the impact of consolidation of acquisitions for the quarter," said Chief Financial Officer Jatin Dalal.

The company gave a salary hike of 9.5% for offshore and 2% for onsite employees from June 1 as a reward for their higher performance.

The company's balance sheet also showed a high rise in the expenses towards sub-contracting, techincal fees and third party application to Rs 1,844.4 crore as against Rs 1,392.8 crore in corresponding quarter last year.

However, what is more worrying is the decline in new clients in the services business division.

Services business division added 50 new clients in the quarter as against 119 quarter ago and 36, a year ago, taking the total number of active clients to 1,208 as against 1,223 quarter ago and 1,071 year ago.

Added to this, the services business added 951 employees during first quarter, taking its total headcount to 173,863 by end of June 30 as against 172,912 quarter ago and 161,789 in same period year ago.

Kotak Securities Senior V-P and Head, Private Client Group Research, Dipen Shah told PTI, “Wipro's results disappointed largely on the margins front and that the revenue trajectory reflects the challenges faced by Wipro in key verticals like energy and utilities as well as in scaling up accounts to larger sizes.”

His disappointment is not misplaced, and there could be more disappointment ahead with low growth expected in the next quarter for Wipro.

It has guided for a revenue of $1,931 million (Rs 12,846.5 crore) to $1,950 million (Rs 12,972.9 crore) for the July-September quarter, translating into less than 1% sequential growth. "We expect the trajectory of growth to build gradually over the course of the year. We will drive operational improvements in Q2, but we may not see the full benefits because there are two additional months of merit salary increases that will come into effect," Neemuchwala said.

He added that he expects "improvements will be reflected much more strongly in Q3 and beyond".

Apart from this, is the impact of Brexit and currency volatility that are expected to hit the IT sector.

On the impact of Brexit, Neemuchwala said while it hasn't had any immediate impact, it is "on the top of the mind". "Brexit's immediate impact is on the currency. In the medium term, we believe Brexit could delay some of the decision making, but we have not seen any immediate impact of it," he added.

(With inputs from PTI and IANS)