Wipro Q3 earnings: Labour code and restructuring costs drag net profit, revenue grows 5.5%

IT services major Wipro reported weak bottomline numbers in the third quarter as consolidated net profit declined 7% on year to Rs 3,119 crore compared to around Rs 3,354 crore year ago due to higher employee benefits costs related to implementation of new labour codes and one-time restructuring charge. Sequentially too, net profit fell 3.9% from Rs 3,246 crore as of quarter ended September 30.

The company reported modest growth in revenue at Rs 23,556 crore, an increase of 5.5% on year from Rs 22,319 crore in the corresponding quarter of previous fiscal and 3.6% from the preceeding quarter.

Wipro's muted performance during the October-December quarter follows other listed peers like TCS, HCLTech and Infosys that had reported pressure on profitability, impacted primarily by one-time exceptional charge related to implementation of new labour codes announced by the Centre in November. This has resulted in higher provisoning for employee benefit expenses in the quarter under review.

India's fourth largest IT services firm reported Rs 302.8 crore as impact on gratuity expenses due to labour codes. 

"The implementation of the Labour Codes has resulted in an increase of Rs 3,028 (million) in the provision for defined benefit obligation, which has been recognised as an employee benefit expense in the current reporting period," Wipro said in regulatory filing to the stock exchanges. It also recorded a one-off resrtrutcuring cost of Rs 263 related to its European business and Capco  

Revenue from IT services segment grew marginally by nearly 5% year-on-year to Rs 23,378 crore, and 1.6% from the quarter ended September 30. In dollar terms, Wipro reported flat growth in consolidated IT services revenue of 1.2% on quarter and 0.2% year ago to $2.63 billion. 

Wipro's business is divided into two segments - IT services and IT products. 

The IT services segment consists of services provided to customers in Americas 1 (includes Latin America and sectors like communications, media and information services, software and gaming, new age technology, consumer goods, medical devices and life sciences, healthcare, and technology products and services), Americas 2 (covers Canada, banking and financial services, energy, manufacturing and resources, capital markets and insurance, and hi-tech),  Europe (United Kingdom and Ireland, Switzerland, Germany, Western Europe), and Asia Pacific Middle East and Africa (Australia and New Zealand, India, Middle East, South-East Asia, Japan and Africa).

Margin play, deals activity

The Bengaluru-based technology major's operating margins for the third quarter stood at 17.6%, an expansion of 40 basis points quarter-on-quarter and 10 basis points from year ago period.

"I would like to highlight that this is one of our best margin performances in the last few years. As we move into fourth quarter, we will need to factor for the incremental dilution of HARMAN DTS acquisition. Our endeavor, as always, will be to maintain the margins in a similar band that we have delivered in the last few quarters," said Chief Financial Officer Aparna Iyer in a post-earnings press conference call.

Compared to the previous two quarters of the current fiscal, the company witnessed a slowdown in deal momentum with total contract value during the October - December quarter at $3.33 billion. Sequentially, this is a 29% decline compared to $4.68 billion as of September 30. In the corresponidng period of the previous year, total deal bookings stood at $3.51 billion.

Wipro's large deal bookings slumped 69.5% to $871 million from $2.85 billion in the quarter ended September 30, and 9.4% on year. The company defines large deal bookings as deals greater than or equal to $30 million in total value.

Sounding optimistic and confident on the deal pipeline, MD & CEO Srinivas Pallia said it is very strong. "In fact, it's a combination of both large deals and smaller deals as well. And this is also, again, secular across the markets and across the industries," he said during the post earnings call.

Guidance, hiring metrics

Going ahead, Wipro has guided for revenue from its IT services business for the January - March quarter to be in the range of $2,635-$2,688 million. Sequentially, this translates to guidance of 0-2.0% in constant currency terms.

Based on the actual currency realized, Wipro has restated guidance of $2,585-$2,638 million for the quarter ended December 31.

Regarding its target on hiring campus freshers till March 31, Wipro Chief Human Resources Officer & Executive Board Member Saurabh Govil said the company plans to recruit 7,500-8,000 of them. The company had earlier guided for hiring around 10,000 campus recruits.

"This quarter, our recruitment from campuses was muted. We had only about 400-odd freshers. But this was a quarter which we wanted to go slow. But next quarter, again, we'll be looking at ramping up to 2,000-2,500 people from the campuses," Govil said.

Wipro added 6,529 employees during the quarter, ramping up the total headcount to 242,021. In the year ago period, the total employee base stood at 232,732.

 Voluntary attrition moderated to 14.2% compared to 14.9% in the quarter ended September 30 and 15.3% in the corresponding period of previous fiscal.