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Wipro: Tepid performance - Views on News from Equitymaster
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Wipro: Tepid performance
Jan 17, 2014

Wipro has announced its results for the third quarter of the financial year 2013-2014 (3QFY14). The company has reported a 2.6% QoQ growth in sales and a 4.3% QoQ growth in net profits. Here is our analysis of the results.

Performance summary
  • Consolidated net sales grew by 2.6% QoQ during the quarter.
  • Operating margin improved by 0.2% QoQ to 23% during the quarter as compared to 22.8% seen during 2QFY14. On an absolute basis, operating profits grew by 3.5% QoQ in the quarter.
  • Net profits grew by 4.3% QoQ. The growth in net profits compared to the fall in operating profit was a result of an exchange difference of Rs 604 m.
  • The company has completed the Opus CMC acquisition that was announced in December 2013.
  • The company has paid a dividend of Rs 3 per share.

Consolidated financial performance
(Rs m) 2QFY14 3QFY14 Change 9MFY13 9MFY14 Change
Gross revenues 109,907 112,713 2.6% 278,170 317,734 14.2%
Expenditure 84,869 86,790 2.3% 193,657 257,040 32.7%
Operating profit (EBITDA) 25,038 25,923 3.5% 84,513 60,694 -28.2
Operating profit margin (%) 22.8% 23%   30.4% 19.1%  
Finance and other income 3,412   11.7% 8,239 10,585 28.5%
Finance expenses 656 898 36.9% 2,298 2,049 -10.8%
Depreciation 2,616 3,109        
Exchange difference   604   2,563 2,849  
Profit before tax 25,178 26,332 4.6% 93,017 72,079 -22.5%
Tax 5,754 6,060 5.3% 12,939 16,064 24.2%
Profit for the period from continuing operations 19,424 20,272 4.4% 80,078 56,015 -30.0%
Profit after tax for the period from discontinuing operations   -   3,488    
Profit for the period 19,424 20,272 4.4% 83,566 56,015 -33.0%
Minority interest 103 125 21.4% 251 312 24.3%
Net profit available to equity shareholders 19,321 20,147 4.3% 83,315 55,703 -33.1%
Net profit margin (%) 17.6% 17.9%   30.0% 17.5%  
No. of shares (m)         2465.5  
Diluted earnings per share (Rs)*         29.6  
P/E ratio (x)*         18.8  
* On a trailing 12-months basis

What has driven the performance in 3QFY14?
  • In 3QFY14 Wipro has delivered revenue growth of 2.6% QoQ. However in the growth in US dollar terms was better at 2.9% QoQ.

  • The IT Services and IT product segments witnessed growth of 2.6% QoQ and 8.3% QoQ respectively.

  • In terms of service offerings, Wipro witnessed broad based growth across services. Application development and maintenance, global Infrastructure services and business application services saw the highest traction.

  • In terms of industry verticals, the company saw well rounded growth. The core verticals of BFSI and manufacturing had a growth of 12% and 9.8% QoQ.

  • In terms of geographies, Wipro recorded a growth of 12.2% in the US and 14.7% in Europe as well as India and the Middle East.

    Revenue breakup (In Rs m)
    Revenue breakup (In Rs m) 2QFY14 3QFY14 Change
    Based on businesses
    IT Services 100,679 103,274 2.6%
    IT products 9,374 10,155 8.3%
    Consumer care &Lighting      
    Others (133) (122) -8.3%
    IT services revenue breakup (Rs m) 2QFY14 3QFY14 Change
    Based on geography
    US 50,138 56,244 12.2%
    Europe 29,096 33,363 14.7%
    India and Middle East 8,356 9,581 14.7%
    Rest of the world 13,088 13,526 3.3%
    Based on service offerings
    Application development and maintenance 20,438 22,430 9.7%
    Global infrastructure services 24,364 28,066 15.2%
    Business application services 32,117 35,730 11.3%
    Product Engineering & Mobility 7,652 8,566 12.0%
    Analytics and Information Management 7,450 8,115 8.9%
    BPO 8,658 9,806 13.3%
    Based on verticals
    Global Media & Telecom 14,022 15,442 10.1%
    Finance Solutions 26,570 29,756 12.0%
    Manufacturing & Hi-tech 19,100 20,965 9.8%
    Healthcare, Life Sciences & Services 10,174 11,948 17.4%
    Retail & Transportation 14,916 16,456 10.3%
    Energy and Utilities 15,897 18,147 14.2%

  • Wipro's operating margin improved by 0.2% in the quarter. This was due to lower direct costs as well as lower selling, general and administrative costs (as a percentage of sales) in this quarter as compared to 2QFY14.

  • The company's net margin improved to 17.9% in 3QFY14 from 17.6% seen in the last quarter. This was as a result in the rise in net profits by 4.3% QoQ. An exchange gain of Rs 604 m helped the company report a growth in net profit which was higher that the growth in sales.
What to expect?
At the current price of Rs 552.5, the stock is trading at a multiple of 18.8 times its trailing 12 month earnings. Wipro had a decent quarter in 3QFY14. Sales growth in US dollar terms came in at 2.9% QoQ.

The management has stated that they are seeing good demand from developed markets. Pricing was stable and the management expected this to remain stable going forward as well but also stated that customers were now demanding more value for money. This would affect pricing in commoditised serves like ADM and IMS.

The management has stated that they were confident of getting back to industry leading growth in FY15.

In terms of newer digital technologies, the management said that it would not contribute significantly to revenue immediately but would be a big component of revenues in the future.

The management has said that the improvement in operating margins was secular in nature and it can be expected to improve from a long term perspective due to operational efficiencies.

The company has a good deal pipeline for the future as well as a good order book and the management stated that they were win rate for new large deals was double of the level seen at the same time last year. The strategy of mining existing large clients is working for the company as the contribution from the top 50 clients in terms of revenues saw an improvement in the quarter.

While the long term prospects of Wipro are good, we believe that most of the upside is already factored in at the current valuations. Therefore we maintain our 'Sell' view on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested and that no single stock comprises more than 5% of your portfolio.

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