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Wipro Profit Beats Estimates on Outsourcing Demand

Azim Hasham Premji, chairman and chief executive officer of Wipro Ltd, listens during an interview in New York. Photographer: Daniel Acker/Bloomberg
Azim Hasham Premji, chairman and chief executive officer of Wipro Ltd, listens during an interview in New York. Photographer: Daniel Acker/Bloomberg

Wipro Ltd., India’s third-largest software exporter, posted a 31 percent jump in profit and beat analysts’ estimates as demand for computer services rose. The shares rose.

Net income gained to 13.2 billion rupees ($281 million) in the three months ended June 30, compared with 10.1 billion rupees a year earlier, Bangalore-based Wipro said today. That surpassed the 12.1 billion rupees average of 34 analyst estimates compiled by Bloomberg.

Wipro’s results add to those of industry leader Tata Consultancy Services Ltd. in signaling rising demand for India’s software services as companies step up technology spending. Wipro’s billionaire Chairman Azim Premji, who responded to a global slowdown last year by freezing pay for almost 100,000 workers, today said the company added a record number of “billable” employees in the first fiscal quarter.

“Since the recession, companies in the West have become extremely conscious on the cost front,” said Jayesh Shroff, who manages more than $1.4 billion in equities at SBI Funds Management Pvt., in Mumbai, including 1.2 million shares of Wipro. “Outsourcing of IT has become that much more imperative. Earlier, it was primarily Fortune 500 that were looking to outsource. Now that universe is rapidly expanding.”

Strong Demand Environment

Sales rose 16 percent to 72.4 billion rupees. That compared with the 71.9 billion rupees average of analysts’ estimates.

Wipro gained as much as 4.2 percent and traded 0.5 percent higher at 417.50 rupees, the highest since April 27, as of 1:11 p.m. in Mumbai. The benchmark Sensitive Index rose 0.2 percent.

“We are seeing a strong demand environment across our industry verticals,” Premji said in a statement.

Wipro provides computer services such as designing and building software programs, product-engineering and back- office support to BP Plc, William Morrison Supermarkets Plc, Pitney Bowes Inc. and other customers. The company, which also makes soaps, light bulbs and hydraulic equipment, added 22 clients in the last quarter.

Worldwide information technology spending, which includes computer equipment and software purchases, will grow 7.8 percent this year after falling 8.9 percent to $1.5 trillion in 2009, according to a July 21 report from Forrester Research Inc. The U.S. will lead the growth, spending an estimated $564 billion on information technology this year.

Spending in the U.S. will outpace gross domestic product growth as companies make up for orders delayed during last year’s recession, according to the Cambridge, Massachusetts- based research firm.

Economists surveyed by Bloomberg this month said U.S. GDP will expand 3.1 percent in 2010 after the world’s largest economy grew at the fastest pace in six years in the fourth quarter, with a 5.6 percent annual rate.

‘Up For Grabs’

Infosys Technologies Ltd., India’s second-ranked software provider, on July 13 reported profit fell 2.6 percent to 14.9 billion rupees after a 30 percent jump in taxes offset a 13 percent increase in first-quarter sales. “While the global economic environment remains uncertain, we continue to see greater demand for services,” Chief Executive Officer S. Gopalakrishnan said at the time.

Tata Consultancy Services last week reported a fifth consecutive quarterly increase in net income as revenue jumped 14 percent to 82.2 billion rupees. The company is in negotiations to add 15 “large” software-services contracts, Chief Executive Officer N Chandrasekaran said at the time.

“Based on the performances we’ve seen from Infosys and Tata Consultancy Services, it’s become clear that there are volumes up for grabs in the near future,” said Vihang Naik, an analyst at MF Global Ltd. in Mumbai. “On the pricing front, we’re not seeing any pressure from clients. Maybe in a couple of quarters you might even see a pricing uptick.”

‘Much More Stable’

Indian software vendors cut prices and renegotiated contracts last year to keep clients who were less willing to spend on technology during the recession. The pricing environment was “much more stable” now, Wipro’s Chief Financial Officer Suresh Senapaty said today.

Revenue from the company’s information technology services business may increase as much as 6.1 percent from the previous quarter to $1.28 billion in the three months ending Sept. 30, Wipro forecast.

Wipro, which derived 57 percent of its information technology services revenue from North America and 25 percent from Europe last quarter, won orders in the period from three Indian state governments and reached an agreement to manage a data center for Citigroup Inc. near Dusseldorf, Germany.

Wipro added a net 4,854 employees at its technology unit last quarter to end the period with 112,925 workers, according to a statement from the company. In June, Premji said the company could add as many as 20,000 employees in the next three years.

‘Warning Sign’

Still, workers at the company’s technology services unit, excluding the back-office and India and Middle East businesses, left Wipro at a rate of 23 percent in the quarter, up from 17 percent the previous quarter, and 8.4 percent a year earlier. The rise in attrition rates is a “warning sign” that “needs watching,” Bhavtosh Vajpayee, head of technology research with CLSA Ltd. in Hong Kong, wrote in a note to clients.

The company increased salaries for its Indian workers by 9 percent in the quarter ended March 31, Senapaty said on a conference call in April, while larger rival Infosys gave 14 percent to 16 percent wage increases to retain Indian workers.

“Currency impacts and wage inflation are the main things to be wary of,” in information technology companies, MF Global’s Naik said. The experienced employees who help the company command a better billing rate from its customers “are in short supply and the poaching in those areas is causing attrition and wage hikes,” he said.

Euro Slump

The euro’s weakness, the currency has lost 10 percent against the dollar this year, and ripples from the Greek debt crisis could result in a 12 percent to 15 percent loss in income for the Europe-based businesses of Indian IT vendors, according to estimates from Forrester. If the euro continues to depreciate, companies may lose more than 20 percent on each European deal, Sudin Apte, a Pune, India-based analyst at Forrester, wrote in a July 1 note to clients.

“It’s certainly having an impact on Indian IT vendors,” Forrester analyst Andrew Bartels said in a phone interview last week. Much of the impact from “lagging” Europe will be offset by an increase in demand from the U.S. and emerging markets in Asia and Latin America, he said. “There’s a strong recovery underway this year, driven by investments in smart computing technologies” that can adapt to location and conditions.

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