There seems to be no limit to the growth of Indian software consulting firm Wipro Ltd. (NYSE:WIT). On news of its latest quarterly report, the stock reached a yearly high of $18. But at its current valuation, investors should have some concern.
In the fiscal third quarter, revenues surged 43% to $899 million and net income was up 40% to $167 million. Wipro landed 37 new customers, and about 72% of revenues came from overseas customers, such as from the U.S. and Europe.
No doubt, Wipro has built a comprehensive platform of services, including information technology consulting, computer coding, software testing, and back-office outsourcing. It certainly helps that India has a relatively lower wage structure, as well as a qualified talent pool.
While it's true that wages have been increasing, Wipro has nonetheless been able to increase the pricing on its contracts (such as during renewals). Keep in mind that the company also has a long history of finding ways to improve operating efficiencies.
Another big issue, of course, is the heavy competition from players like Accenture (NYSE:ACN), EDS (NYSE:EDS), and IBM (NYSE:IBM). In fact, these players have been aggressive in their hiring in India.
Ironically, the competition has a benefit; that is, it's a validator of outsourcing. Hey, if IBM is providing these types of services, it must be a good thing, right? In fact, companies like Proctor & Gamble (NYSE:PG) and GM (NYSE:GM) certainly think so.
Conclusion
Simply put, there's a global move towards outsourcing, and it's not slowing down. For example, going into the fiscal fourth quarter, Wipro expects its outsourcing revenues to increase by 5.4% sequentially to $685 million.
However, Wipro's valuation certainly reflects the high growth rate, with Capital IQ showing an enterprise value-to-revenue multiple of 6 and an EV-to-EBITDA multiple of 26. This is in line with other Indian competitors, such as Infosys (NASDAQ:INFY).
But if there is a slowdown in global IT growth, it could be tough on the company's stock (which was the case during the dot-com bust). And, as the company offers new services, engages in larger contracts, and contends with more competition from major players, it's not getting any easier to keep growing.
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Accenture is an Inside Value recommendation.
Fool contributor Tom Taulli does not own shares of any company mentioned in this article. He is currently ranked 1,623 out of 19,864 in Motley Fool CAPS.
