BANGALORE/MUMBAI (Reuters) - Wipro (WIPR.BO) overhauled the management of its key outsourcing business and reported third-quarter profit growth that lagged its main rivals, sending its shares down the most in a year.
India’s No. 3 software services exporter has been struggling to win big contracts as the sector recovers from the global downturn, and its shares and margins have suffered compared with its larger competitors, Tata Consultancy (TCS) (TCS.BO) and
“Wipro has been underperforming both TCS and Infosys for the last five to six quarters,” said Hardik Shah, IT sector analyst at brokerage KR Choksey Shares & Securities.
Rival Tata Consultancy Services posted a 30-percent rise in quarterly profit and Infosys reported a 14-percent increase.
“Something was wrong, things were not quite working out and this (the management change) seems to be a drastic step,” he said. “It will take a couple of quarters at least for the new strategy to come through. There should be some uncertainty till then.”
Wipro said co-CEOs of the IT unit, Girish Paranjpe and Suresh Vaswani, would resign effective January 31 and be replaced by company veteran T.K. Kurien to make the organisation structure simpler.
The unit, which develops software applications, integrates IT systems and manages call centres for clients such as Citi (C.N), Cisco (CSCO.O) and Credit Suisse CSGN.VX, accounts for about three-quarters of Wipro’s revenue.
“I don’t think we should be making excuses, ” Chairman Azim Premji told a news conference. “We have underperformed in quarter three, relative to competition and relative to our potential as a company. Let’s just acknowledge that. What we are trying to do is improve performance in quarter four and significantly improve performance going forward.”
Premji, the world’s 24th richest billionaire according to Forbes and termed “India’s Bill Gates” by the magazine. He quit his engineering degree at Stanford to take over his father’s ailing vegetable oil business in the mid-1960s, before diversifing into hydraulic cylinders in the 1970s and information technology in 1980.
Shares in the company closed at 456.05 rupees, down 4.6 percent, their biggest fall in a year.
Tata Consultancy was trading down 0.1 percent and Infosys fell 1.5 percent in a main Mumbai market down 0.4 percent.
“This is definitely a surprise,” said R.K. Gupta, managing director of Tarus Mutual Fund, which owns Wipro shares. “For Wipro, resignations by such key people could lead to losing out on some orders as the contacts move away with the employees.”
Wipro has lagged in share price performance and profits in recent months, while its 2010 operating margin of 21 percent was lower than Infosys’ 31 6 percent and Tata Consultancy’s 24 percent, according to data from Starmine.
Smaller rival Tech Mahindra TEML, which provides IT solutions to global telecom firms and in which BT Group (BT) owns a roughly 25 percent stake, posted a 10 percent rise in third quarter profit at 2.06 billion rupees ($45 million).
The firm, which acquired Satyam Computer SATY in 2009 and rebranded it as Mahindra Satyam SATY, said revenue rose two percent to 12.11 billion rupees ($266 million).
The management shakeup is one of several recent changes at the top among high-profile technology companies. On Thursday, Hewlett-Packard Co (HPQ) said it was restructuring its board and Google announced GOOG co-founder Larry Page will take over as CEO. Apple’s AAPL visionary CEO Steve Jobs announced a leave of absence earlier this week.
Wipro forecast IT services revenue of $1.38 billion to $1.41 billion for the fiscal fourth quarter, up three to five percent from the quarter ended in December.
Chief Financial Officer of Wipro’s IT business Manish Dugar said the company, which is also listed in New York, was seeing increased demand from clients in the United States and Europe - its two biggest sales markets.
“While there is the discussion on double dip, sovereign fiscal situation in Europe, it has not impacted the private sector...the view is that budgets will see expansion and will get spent,” Dugar told Reuters.
Global spending on technology is likely to rise 5.1 percent to $3.6 trillion in 2011, according to research firm Gartner, higher than its previous estimate as the dollar’s recent weakness helped push IT spending beyond its forecast for 2010.
Volatility in global currencies is also a worry to the export-focused sector.
Bangalore-based Wipro said fiscal third-quarter net profit rose 10 percent to 13.19 billion rupees ($290 million) under international accounting standards from 12.03 billion a year ago, matching forecasts.
Wipro, which also makes computer hardware, consumer care products and electric bulbs, posted revenue of 78.3 billion rupees ($1.7 billion) in the quarter, compared to analysts’ estimates of 80.1 billion rupees.
The firm added 36 new clients, its biggest client addition in five quarters. It added 3,591 net staff in the third quarter.
Additional reporting by Prashant Mehra, Ami Shah and Manasi Phadke in MUMBAI and Ploy Ten Kate in BANGKOK; Editing by Lincoln Feast