Indian IT industry smackdown: Wipro vs Infosys

Shares in global Indian IT company Wipro (WIT, quote) continued the trend started earlier by Infosys (INFY, quote) with a big drop on earnings. The stock fell 5.5% on Wednesday as investors overlooked consensus earnings to focus on a weak outlook for the second quarter.

Image courtesy Metroman87: http://commons.wikimedia.org/wiki/File:Wipro_InfoPark_Campus.jpg

Wipro's campus in Kochi InfoPark, India

The company reported that sales grew 19% over the last year but may decline by as much as a percent in the sequential quarter. The impetus behind the weak outlook was a further decline in the European economy and slower growth in the United States.

Shares at the information technology provider are down 7.0% in the last month, compared to a drop of almost 20% for Infosys and flat performance by American rival International Business Machines (IBM, quote).  

Despite the weak outlook given by management, Wipro continues to perform well. Revenue growth of 19% is well above that of IBM and Infosys, with growth rates of 3.5% and 15.8% respectively. The company’s operating margin is below that of Infosys, at 17.3% versus 28.8% at its larger rival, which may point to a problem with cost controls.

While fundamentals remain attractive at Wipro, investors may be looking at its valuation relative to competitors. Shares trade for 21.3 times trailing earnings while IBM and Infosys are comparatively cheaper at 14.7 and 15.4 times respectively. For Wipro to be comparatively valued, shares would have to come down another 30%.

I tend to agree with a previous article detailing the post-earnings plunge in Infosys and go with INFY for its cheaper valuation and more attractive operating margin. Both companies should benefit from the need for corporate America to spend record amounts of cash on IT, Europe looks to improve incrementally in the second half, while more efficient operations at Infosys seem to give it the relative edge over its domestic competitor.

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