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Wipro: Standing firm - Views on News from Equitymaster
 
 
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  • Jan 1, 2001

    Wipro: Standing firm

    For those so apprehensive about the prospects of the software sector, this is another piece of news that will add fuel to their doubts. Its been reported that Wipro will finally end services to GE, one of its major clients. The reason for this dispute is believed to be billing rates. The present contract with GE is to end mid 2001.

    Reacting to the rumors, Wipro has refused to comment. According to the statement issued by the company, GE, which accounted for more than 19% of the revenues of the Global IT division of Wipro a couple of years ago, will only be about 5% by the end of FY01. But one thing is quite clear from the statement, that billing rates for GE are lower than that for other clients.

    Is it a start of things to come? What impact will this have on Wipro’s top and bottomlines?

    The first question is very critical. Will the software industry be seeing a decline in billing rates? It seems likely. Until now, Indian companies were offering low billing rates due to offshore development abilities. This was the reason for high growth rates for the all software success stories but now with the eminent economic slowdown in the US the companies will be looking to cut IT expenditure. The companies that will be the most affected will be those that are mainly in low tech-labour intensive jobs. Another force acting against the companies is the rising wage bill. With attrition rates averaging at 24% companies are finding it difficult to retain talent.

    The companies that will be able to avoid the billing rate pressure will be those that are higher up the value chain into areas like consulting, technology and products. This is due to the fact that entry barriers are high and due to lack of supply they can charge a premium. Companies like Wipro, Infosys, Hughes and Visualsoft belong to this segment.

    This brings us to Wipro. Its billing rates are around 45% lower compared to overseas competitors. The company had succeeded in increasing its billing rates by 12% in the first six months of financial 2000-01. If we look at the projections for Wipro it is expected to grow its FY02 revenues by 34%, which are estimated to be Rs 43, 050 m (FY01E is Rs 32,047 m).

    Even if the GE contract is not renewed, the effect is not going to be a big one. This will be offset by Wipro’s focus on new areas like ASP and business intelligence.

    Impact Analysis Rs (m)
    FY02E 42,050
    Software earnings (56%) 23,548
    GE contributions (5%) 1,177

    But its trump card is the R&D services that accounts for almost half of the revenues of the Global IT group. This group provides solutions for the software industry. The billing rates have been traditionally higher than other areas. Also, Wipro has a vast experience in the area.

    To conclude, neither the economic slowdown in the US economy nor the loss of GE account will have any material impact on Wipro. There is no reason for irrational anxiety.

     

     

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