As new information technologies around the world grow ever larger and more complex, the companies that rely on them increasingly need professional services to install, integrate, and maintain IT systems. That's been good news for Wipro (NYSE:WIT), whose India-based operations offer access to low-cost labor. But while its salaries may be inexpensive, its stock price is anything but.
In its third-quarter earnings results, released yesterday, revenues increased 41% to $765 million. Wipro posted net income of $152 million, or $0.11 per share. The company wasn't alone in enjoying a robust quarter. Key competitors Infosys (NASDAQ:INFY) and Tata Consultancy Services reported strong results as well.
Wipro was founded 59 years ago but only began to provide information technology (IT) services in the 1980s. It currently develops business software applications, handles infrastructure outsourcing for back-office needs, tests software, and provides R&D services, among other areas of expertise.
The company focuses on major contracts, which can easily top $50 million or more. Its customers include biggies like NCR, Honeywell, and Cisco. Wipro has also formed key strategic alliances with Microsoft, Oracle, and Sun.
To keep its growth going, Wipro has been an aggressive acquirer. In the third quarter, it purchased six companies with an aggregate value of $200 million.
Lower labor costs are a critical advantage of outsourcing IT to India, but this difference is starting to erode. Wipro's operating margins for its IT services division deteriorated in the third quarter, falling from 24.4% in the second quarter to 21%. Wipro is also facing increased competition from U.S. players; IBM (NYSE:IBM) plans to invest $6 billion in India over the next three years, and other major firms such as Accenture (NYSE:ACN) and EDS (NYSE:EDS) are investing heavily in India. That should put further upward pressure on local wages.
At more than $500 billion, the global market for IT services is massive, and it continues to grow as companies outsource their complex needs. However, Wipro is starting to lose its cost advantage, and given its high valuation -- 42 times earnings -- the stock looks increasingly vulnerable.
Further homegrown Foolishness:
- IBM: "I" Stands for India
- Infosys: Strong Quarter, Still Expensive
- Infosys: Flat World, Flat Investment?
Accenture and Microsoft are Motley Fool Inside Value picks. To find more of the market's best bargains, try Philip Durell's premium newsletter service free for 30 days.
Fool contributor Tom Taulli does not own shares mentioned in this article.
