While Wipro’s Technologies posted a strong sequential growth in 2QFY01, due to the revenues coming in from the US$ 75 m project for a subsidiary of Lattice group, the expectations for this quarter are muted. This is due to the fact that growth figures that have come out from software companies including Infosys, Mastek, Digital and Hughes, indicate a very challenging market environment.
However, Wipro did manage to close a large number of contracts during the quarter. Pinnacle West Capital, a US based utility company with revenues of around US$ 3.5 bn billion selected Wipro as its software development, maintenance and integration partner. Wipro will provide IT services for Pinnacle West's Customer Information Systems (CIS), which will enhance services to the company's more than 0.8 m customers. There would be a significant offshore component to the project. Amongst the reasons cited by Pinnacle selecting Wipro was the Indian software major’s superior grasp of business and IT challenges facing Pinnacle. This indicates that gradually domain competency is playing a pivotal role in helping companies bag contracts. With information technology getting more and more critical to businesses, organizational strategies are increasingly relying on IT for the competitive edge.
Another major market that Wipro penetrated during the 3QFY02 was service for ASPs (Application Services Providers). The company signed an outsourcing agreement with Corio, a US based ASP. With organisation looking to cut IT costs, a large number of services are being rented out from ASPs. This is a trend that is catching on with corporates in the West. The ASPs are in turn outsourcing a large number of service to IT services companies like Wipro. According to the agreement, Wipro will help the company to establish a joint development center to extend its ASP services by providing services in the areas of security, billing, infrastructure management and application integration services.
Alliianz Ireland hired Wipro during 3QFY02 for services related to software development for business systems, customer information and analysis. Allianz uses Insure 90, an AS/400 application, as their core software application. Wipro will provide maintenance and support services for this system.
To broaden its portfolio Wipro announced a partnership with Mercator Software. Working with Mercator, Wipro will offer customers Enterprise Application Integration (EAI) solutions, including Mercator Integration Broker, a middleware. Infosys too in a similar move tied up with TIBCO to provide EAI services. So far corporates have spent vast fortunes on putting into place systems for ERP, CRM and SCM. Unless these systems are seamlessly integrated the real benefits of the IT investment will not be achieved. Therefore, markets for EAI has show strong growth in the recent quarters
The company also announced a tie up with Interwoven a provider of Content Infrastructure. Interwoven's Content Infrastructure product suite includes products for content aggregation, collaboration, management, intelligence and distribution. Wipro will implement these solutions as part of its "architect, integrate and manage" strategy to joint customers.
Wipro also announced a tie up with Geometric Software. They have entered into a strategic alliance for providing end-to-end IT solutions to industrial markets in US, Europe and Japan. Wipro is the traditional software services company with strong expertise in application development, maintenance and integration. While Geometric will provide solutions related to geometry, Wipro will help integrate these solutions with the enterprise systems. There is another aspect involved in the partnership, i.e. logistics. Geometric can now reach clients through Wipro’s presence in geographies like Europe where it does not have much of a presence. This move would give Wipro a strong edge in the engineering services markets. The service offering that has shown the steepest growth amongst Infosys revenue streams for 9m FY02 is, engineering services. Thus, Wipro is looking to make most of the surge in demand.
The company also signed a contract with Santera Systems, a provider of switching equipment for the global communications market, for setting up a global development center. The company will outsource R&D projects to Wipro. The contract also stipulates the scope of joint product development.
Wipro Technologies was recommended by DNV for TL9000 certification for all Telecom projects across Bangalore, Hyderabad and Chennai during the quarter. TL9000 is a telecom industry specific quality standard. This makes Wipro the first Indian company and first software services company in the world to achieve TL9000. Conformance to Industry standards such as TL9000 further assures Wipro's telecom clients of quality processes and methodologies at Wipro Technologies. For the client this means lower total cost of ownership through schedule adherence, zero defects, on-time service and improved productivity.
On the hardware front there is a lot of confusion. While MAIT claims that the number of PCs sold declined by 4% in 1HFY02 compared to 1HFY01, IDC claims the figure showed a growth of 5%. However, both were agreed on one point that the market conditions have worsened as the year progressed. Therefore, revenues from Wipro Infotech are also likely to show softness. We expect Wipro Infotech’s revenues to decline by 20% YoY.
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Wipro Technologies is expected to post a sequential 1% growth in revenues. This is due to a 1% sequential decline in revenues from the R&D group. The R&D group focuses on providing services to technology majors like Cisco and Nortel. The equipment manufacturers have been facing very tough business environment and therefore, have cut corners. This will continue to impact companies like Wipro that provide services to these companies. We expect a 10% sequential decline in revenues from the telecom and Internet working space. The revenues from embedded systems and Internet access group is also likely to show a decline. However, the revenues from telecom and Internet service providers might show growth on the back of the large order it has won in this space.
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The company has managed to improve billing rates for the past two quarters and therefore we expect the billing rates to be flat. The decline in revenues from certain segment is also due to the fact that the company has not reduced its billing rates. Consequently, it has held on to operating margins.
At the current market price of Rs 1773, the stock is trading at a P/E multiple of 51x its FY02 estimated earnings. This looks quite expensive considering the fact that the company is expected to grow at a CAGR of 22%. However, markets might be factoring in a acquisition that will add pace to the topline.