Both Infosys and Wipro have shown healthy appetite for inorganic growth through acquisitions.
Both Infosys and Wipro have shown healthy appetite for inorganic growth through acquisitions.

Infosys’ best quarterly result of the decade-17 percent year-on-year increase in profits-has come for comparison with its rival, Wipro’s best quarterly results ever with an impressive 35 percent year-on-year increase in profits. Both have something to go to town with, given the fact that the pandemic was still raging during April-June 21 the period to which the results relate.

Underscoring strong demand for India's outsourcing service providers, IT services company Wipro on July 15, 2021 reported a 35 percent year-on-year jump in consolidated net profit to Rs 3,230 crore for the quarter ended June 30, 2021. Revenue rose 22.4 percent to Rs 18,250 crore. Wipro expects revenues from its IT services business to be in the range of $2,535 million to $2,583 million for quarter ending September 30, 2021, a growth of 5.0 percent to 7.0 percent.

A day earlier, the country's second-largest software services provider reported a consolidated net profit of Rs 5,195 crore for the quarter ended June 2021, thereby growing 2.3 percent sequentially. However, the company increased its full-year revenue growth forecast in constant currency terms to 14-16 percent from 12-14 percent earlier.

Tech stock rally on bourses

Small wonder then that the market has witnessed a rally in tech shares on the back of the impressive performance of the IT sector, despite the corona gloom. Analysts say strong long-term fundamentals, weakening rupee and stronger quarterly growth numbers have benefited the Nifty IT index and its main stocks excluding TCS. IT companies’ order books have received a shot-in-the-arm with the pandemic putting a premium on online sale of goods and services.

Conglomerates and markets

What is Wipro today was incorporated in 1945 as Western India Products manufacturing vegetable oils. Gradually it diversified into soaps and detergents, electrical products including fluorescent bulbs and embraced the information technology service business in 1980s. Markets hate conglomerates so much so that there is a unique term called ‘conglomerate discount’. Tata Sons Ltd realized this when in 2003 it spun off its crown jewel Tata Consultancy Services (TCS) into a separate company. The rest as they say is history. TCS true potential lay hidden under the closely-held Tata Sons. Once out in the open, it blossomed.

To be sure, conglomerates have their uses, chiefly diversification and risk minimization in the sense of not putting all shareholders’ eggs in one basket. They also provide an opportunity to minimize tax bill what with the income tax law allowing loss of one division to be set off against the profits of another in the same company. But the core competence theory, with its accent on sticking to one’s knitting, has come to hold sway over the market in the last couple of decades. Despite segment reporting, conglomerates are perceived to be opaque. Wipro, perhaps, should take a leaf out of Tatas and hive off its IT services business into a separate company. Vanaspati, FMCG, electric goods and IT is too heady a mix!

Infosys is a pureplay IT company, employing about 2, 50,000 people as against 1, 95,000 by Wipro and 5 lakh by TCS. Like in the telecom business, where the accent is on average revenue per unit (ARPU), in IT sector too the accent should be revenue per employee. There is no point piling up employees unless the incremental employee is going to contribute by way of additional revenue just as there is no point in merely adding number of subscribers by a telecom company without the accretion translating into additional revenue. TCS has been fortunate in this regard with sizeable in-house business (from the massive Tata stables) coming its way. Others will have to look beyond banking and insurance clients to grow. Both Infosys and Wipro have shown healthy appetite for inorganic growth through acquisitions. That is a healthy sign.

(The writer is a senior columnist and tweets @smurlidharan)

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