Wipro Needs to Think Differently

| About: Wipro Limited (WIT)

Even as the economic headwinds approach gale force, the Indian IT outsourcing industry continues to deal with the aftermath of the Satyam fraud revealed earlier this year. Amid such worries, Wipro Ltd (NYSE:WIT), another Indian giant and one of my Top 10 Outsourcing Stocks, announced rather depressing Q3 results.

Revenue of $1.1 billion declined 0.9% over the year. In constant currency, revenue grew 3.5%. EPS of $0.13 was marginally shy of the Street’s estimates of $0.14. In Europe, there was good growth of 24% on a constant currency basis over the year. The India and Middle East businesses grew 52% in constant currency over the year.

During the quarter, Wipro announced the acquisition of Citi Technology Services Ltd., Citigroup’s in-house IT services provider in India, for $127 million. As part of the transaction, Wipro and Citi will enter into an agreement for the delivery of Technology Infrastructure services and Application Development and Maintenance services for a period of six years, guaranteeing revenues of $500 million over the term.

Wipro’s management foresees three major drivers of growth in a depressed economy. First, the company expects customers to look for an end-to-end service provider to help reduce overhead and the cost of managing relationships. The company is well placed to tackle this on account of its wide service portfolio spanning consulting, application development and maintenance, R&D engineering, technology infrastructure services, package implementation, testing services and business process outsourcing.

Second, the company expects customers to look for partners who can address their capital conservation needs and reduce operating expenses. Wipro is capable of addressing the issue through its services of process optimization, application optimization and infrastructure consolidation. Third, the company expects customers to look for partners who are financially strong and sustainable. Wipro should be able to win the battle on that ground as well.

Despite the above analysis Wipro seems to have done on potential customers, the company is still lacking in differentiated products or services that have any IP strength. With Obama leading the government, outsourcing jobs from the U.S to other countries may become more difficult. The Obama administration is clearly showing signs of using tax policy to prevent outsourcing to the extent they can. Add to that the annual salary increments that Indian firms have been doling out, and the Indian outsourcing industry is in some danger. To be fair, the salary hikes have slowed down under the recession scenario.

The sad part is that not only Wipro is turning a blind eye to either product development or SaaS, but it’s the entire Indian software industry, as well. Its current outlook makes me repeat that the Indian software industry needs to diversify into other areas such as SaaS, Enterprise 3.0 and Web 3.0 if it really wants to play in the big league.

If you are interested in understanding India’s innovation ecosystem, please read, India’s Innovation Gap, this discussion on Entrepreneurship in India and a discussion on the gap in product management capabilities. Together, they offer a picture of India’s stalling innovation eco-system, as the outsourcing industry is maturing, and to an extent slowing down.

At the time of writing, Wipro’s stock was trading at $6.04 with a market cap of $8.79 billion. The company can still play a leadership role in building/acquiring a portfolio of SaaS or software product businesses. However, it needs to think differently, in order to get there.

Disclosure: None