Global rating agency Standard & Poor’s has raised its rating and estimates on India’s number 4 IT services firm, Wipro.
The better rating and estimates reflect an improvement in Wipro’s performance since a new management team under the leadership of TK Kurien took over in early 2011.
S&P now expects Wipro’s revenue in the last financial year to have grown 18-20%, instead of the “low double digits” (10-13%) it had predicted earlier. As a result, S&P raised Wipro’s rating from BBB to BBB+. BBB+ is just a notch below the ‘A-‘ rating. The top rating is AAA. S&P ratings impact the percentage of interest that a company has to pay, when taking a loan.
“We believe this (rating change) reflects the management’s focus on pursuing revenue growth, after a restructuring last year. A sharp depreciation in the Indian rupee over the past nine to 12 months also supports Wipro’s revenue growth,” S&P said.
It also pointed to numerous improvements in the company’s operating metrics, such as the number of big clients, since Kurien took over.
“The company has improved its pace of client addition since the management was restructured. The number of large clients (those contributing revenues of more than US$100 million) has risen to six as of Dec. 31, 2011, from one as of Sept. 30, 2010,” it noted.
It further predicted a “low double-digits” growth in the current and next year for Wipro, “despite the challenging environment in its key markets of the U.S. and Europe.”
Out of India’s top five IT services firms, including Infosys, TCS, HCL and Cognizant, Wipro had taken the longest time in recovering from the global recession of 2008-09.
While smaller competitors such as HCL Technologies and Cognizant continued to see strong growth even during 2009-10, the big three found revenues and margins under pressure.
However, Wipro found it difficult to get back to the growth trajectory even after Infosys and TCS had managed to, leading to the management reshuffle of early 2011.
Wipro’s profitability, measured by its EBITDA margin, is already low at about 20%, when compared to Infosys and TCS.
EBIDTA is a measure of the profits generated by a company’s operations, irrespective of non-operating factors such as interest payments, write-offs etc..
Wipro’s EBIDTA margin was about 24% in 2006-07. S&P expects Wipro’s EBITDA margins to be at 19%-19.5% range over the coming two years.
“The company’s EBITDA margins compare favorably with global IT services peers’ although they are weaker than larger Indian peer,” it noted.
