Wipro – Any surprise or Beginning of a Continuum?

Wipro has reported a 6.72% decrease in the consolidated net profit for the quarter ended 30^th June 2016 as compared to 30^th June 2015. Is the profit decrease a surprise or have conditions been conducive to a lower growth rate for some time now? 

If we consider the period from 2009-2016, employee expenses (including travel and sub-contracting fees) registered a growth of 1.61 times from Rs. 11,501 crores to Rs. 30,059 crores. Over the same period, net revenues increased only 1.08 times from Rs. 21,507 crores to Rs. 44,685 crores. In other words, revenue growth has not been able to match up with the employee expenses growth.

Compare this with TCS where employee expenses grew 2.84 times and revenues increased 2.99 times over the seven-year period. Employee cost drivers are critical to the information technology industry. If the revenues are not able to better or match-up with the employee expenses the slip is going to start showing and that is what is happening with Wipro.

 

Further, the ratio of employee expenses to net revenues has increased almost 14% compared to 7.14% for Infosys and a decrease of 2.36% for TCS over the seven-year period.

Moreover, there is an across the board decrease in segment results across all the segments (except healthcare). Considering the aggregate segment results, the operating profit ratio has declined 2.56% over a period of just two years (2014-16). Wipro was not giving a breakup of service segments before 2014.

The combination of increased employee expenses and lower segment results has been building up for some time now and the effect is only beginning to show.