Foolish Forecast: Whip Inflation With Wipro

Once upon a time, in a land not far away, ruled by the good king Gerald Ford, a nation mobilized to "Whip Inflation Now." As investors gear up to learn how Indian outsourcer Wipro's (NYSE: WIT  ) fiscal Q2 2007 turned out on Friday, they might ponder investing outside U.S. borders as one way to avoid getting steamrolled by a downhill-racing dollar.

What analysts say:

  • Buy, sell, or waffle? A whopping 29 analysts follow this stock, giving it 17 buy ratings, seven holds, and five sells.
  • Revenue. On average, they expect sales to rocket 43% to $1.1 billion.
  • Earnings. Meanwhile, profits are predicted to rise "only" 18% to $0.13 per share.

What management says:
Much as rival Infosys (Nasdaq: INFY  ) did last week, Wipro focused on currency exchange rates when describing its results last quarter. To combat "strong headwinds" caused by an "appreciating rupee," Wipro is taking a two-pronged approach: First, it's raising prices so that the relatively devaluing currencies it gets paid in will translate into more profit -- rupees -- back at home. Second, as fellow Fool Tom Taulli pointed out, the company aims to "ramp up acquisitions in areas like Europe."

And apparently, in America, too. In August, Wipro announced a $600 million buyout of Infocrossing, a New Jersey-based outsourcer that in fiscal 2007 booked $232.4 million in revenue, earning $9.3 million.

What management does:
Also much like with Infosys, the rupee ruckus seems more sound than fury at Wipro. The appreciating rupee / devaluing dollar may be crimping growth somewhat, but the firm's margins are holding up just fine. Gross margins are down just a little more than one percentage point in the past year; operating margins are down a bit more, net margins a bit less. On an operating basis, Wipro remains on par with Satyam (NYSE: SAY  ) margin-wise, a ways behind Infosys, and far ahead of U.S. rival IBM (NYSE: IBM  ) .

Margins

3/06

6/06

9/06

12/06

3/07

6/07

Gross

32.5%

32.3%

32.3%

31.6%

31.6%

31.2%

Operating

21.0%

21.0%

21.2%

20.5%

20.1%

19.6%

Net

19.1%

19.3%

19.6%

19.4%

19.5%

18.8%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Before we close today, let's take another look at that Infocrossing deal, shall we? At first glance, it looks like a win for Wipro. The 2.6-times-sales valuation means Wipro has bought itself a company for about half the multiple to sales that its own shares command. On the other hand, Infocrossing earns just a 4% profit margin. That's a far cry from the 19% that Wipro itself nets on its revenue. If Wipro can leverage higher margins out of Infocrossing -- all well and good. But if it can't, I have to wonder whether growing by acquisition might be the wrong move for Wipro.

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