Search the Internet            Tips

Wipro walks out of its contract with GE

NetScribes/Ganesh Ramamoorthy

Wipro Technologies has decided to walk out of its software development contract with General Electric due to differences on billing rates. A senior Wipro official confirmed the move to NetScribes but refused to divulge further details.

"There were a lot of discussions on the billing rate issue with GE, but we are not in a position to offer more comments at the moment," the official said.

Though walking out of the GE contract would mean a loss of around 10 per cent of Wipro's revenues, analysts are not really perturbed. For the September quarter, Wipro reported a net profit of Rs 1.54 billion on net sales of Rs 7.4 billion.

Wipro was renegotiating the billing rates with GE for the past three months. The earlier billing rates were $17 per man-hour, which was apparently lower than Wipro's internal benchmark of around $25 per man hour.

"GE is famous for paying very low rates. And most Indian software companies have refused to work with GE because of this reason. So Wipro walking out of the contract is not really a big issue. On the contrary, it is good," said an analyst with LKP Shares and Securities.

Analysts say that before Wipro, Infosys and Satyam Computer did the same thing to GE on the same issue. GE, on its part, is setting up its second development centre in India at Hyderabad.

"GE has been very stiff on its rates. It shifted from Infosys around a year ago on pricing issues and has now shifted from Wipro," said a fund manager with Asit C Mehta Brokerage.

"The question to ask is why is anyone interested in a customer who only plays on price. Is the quality of work not important?" he said.

Wipro has already redeployed around 400 of the total 900 professionals working on the GE contract on other projects, which yield higher rates. The rest are expected to be redeployed in the next six months on similar higher rate projects.

"It is a very good strategy that will help maintain operating margins," the fund manager said. "But the only risk here is that they should have the order flow to make up for the lost account and maintain the revenue inflows."

Indian IT companies have been under pressure off late to move up the value chain and increase billing rates in tune with the rising wages to maintain profit margins.

The billing rate issue has taken the markets by storm following a report by US brokerage house Credit Suisse First Boston that the pricing power of Indian software companies is set to decline in the coming years.

At mid-day trading on Thursday, the Wipro scrip was trading at Rs 2283.95 on the on the Bombay Stock Exchange, up Rs 27.75 from its previous close, on a total volume of 417,000 shares.

At its current market price, the scrip is trading at a forward earnings multiple of 127, with an estimated earnings per share of Rs 23.47 for fiscal 2001.

Money

Business News

Tell us what you think of this report