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Proposed salary increase, tax outgo to hit profit: Wipro
April, 28th 2011

Wipro's fourth quarter results were in line with market's expectations. Despite this, its stock fell by nearly 3% on Wednesday, after the country's third-largest IT exporter guided for a dismal June quarter.

At the higher end of the guidance range, Wipro expects a 1.5% sequential revenue growth in the dollar terms for the first quarter of FY12. Its larger peer Infosys, too, has guided for a 1.8% revenue growth for the quarter. This puts a question mark over the near-term outsourcing demand scenario.

Over the past few quarters, Indian IT exporters have reported a strong traction in the global offshoring demand. With multiyear discretionary projects back on track, top IT players have so far reported a 4-6% sequential volumes growth.

Some industry trackers feel that this, however, may recede if the economies in Europe and the US take longer to recover. Apart from the external factors, Wipro has to also grapple with concerns related to its own growth. The company has been a laggard in winning new business compared with its peers, TCS and Infosys.

In the past three fiscals, Wipro's share in the total incremental revenue of the three players declined by 10 percentage points to 21% in FY11. Also, the profitability of its incremental revenue almost halved during the period. To address its growth concerns, Wipro has undertaken an internal restructuring exercise across verticals. It has also continued its inorganic growth strategy.

These factors will play a crucial role in determining the company's growth in the next four-six quarters. For instance, recently, the company acquired SAIC (Science Application International Corporation), a firm focused on oil and gas software for $150 million. The buyout is likely to enhance the company's offerings in the energy and utilities space which forms nearly 10% of the company's overall revenue.

This is the company's eighth acquisition in the past five years, however the strategy has not propelled well for Wipro's growth over the years. Wipro will also have to reconsider its strategy of keeping a low profile in the fast-growing banking and finance vertical.

Wipro draws nearly 27% of its revenue from the BFSI segment against over 40% drawn by TCS. In the near term, Wipro's profitability will continue to face pressure given the proposed 12-15% salary increase and higher tax outgo.

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