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Wipro: IT services see muted growth - Views on News from Equitymaster

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Wipro: IT services see muted growth
Jan 20, 2010

Performance summary
  • Sales remain flat sequentially during 3QFY10, primarily on account of muted performance from its IT services and IT product segments.
  • Operating margins expand by 0.6% QoQ. This is on the back of cost containment measures and improved volumes.
  • Net profits grow by 5% QoQ during the quarter on the back of lower interest and depreciation charges, coupled with higher share of gains from associates.
  • Employee strength of the IT services business stood at 102,746 at the end of December 2009. IT services added 4,855 (net) employees during 3QFY10.
  • IT services adds 31 new clients during the quarter.


Consolidated financial performance
(Rs m) 2QFY10 3QFY10 Change 9mFY09 9mFY10 Change
Net Sales 69,402 69,634 0.3% 191,351 201,928 5.5%
Expenditure 54,358 54,090 -0.5% 153,826 157,945 2.7%
Operating profit (EBDIT) 15,044 15,544 3.3% 37,525 43,983 17.2%
Operating profit margin (%) 21.7% 22.3%   19.6% 21.8%  
Other income 1,172 924 -21.2% 3,897 3,091 -20.7%
Interest 561 219 -61.0% 3,016 1,387 -54.0%
Depreciation 2,016 1,923 -4.6% 4,993 5,737 14.9%
Profit before tax 13,639 14,326 5.0% 33,413 39,950 19.6%
Tax 2,085 2,291 9.9% 4,792 6,238 30.2%
Minority interest (58) (31) -46.6% (50) (139) 178.0%
Equity in earnings of affiliates 121 170 40.5% 327 376 15.0%
Profit after tax/(loss) 11,617 12,174 4.8% 28,898 33,949 17.5%
Net profit margin (%) 16.7% 17.5%   15.1% 16.8%  
No. of shares (m)       1,463.7 1,467.8  
Diluted earnings per share (Rs)*         30.0  
P/E ratio (x)*         24.4  
* On a trailing 12-months basis

What has driven performance in 3QFY10?
  • Wipro’s topline grew marginally by 0.3% QoQ during 3QFY10. This was primarily on account of muted performance in the IT services and products businesses. The IT services business, which contributed 74% to the company’s total sales, grew by 3.4% QoQ. The IT products business (14% of sales) could not match up the robust growth witnessed in the last quarter and saw a sequential decline of 15% QoQ.

    Further, Wipro’s consumer care and lighting business (9% of sales) grew by around 3% QoQ during 3QFY10. In terms of industry verticals, the company registered robust business in the healthcare services and energy and utilities verticals, which contributed nearly 9% and 10% respectively to the consolidated IT services revenue during 3QFY10. The company also witnessed an uptick in demand in the financial services and media and telecom segments. The company witnessed a decent performance for its application development and infrastructure services. However, the performance remained muted for package implementation and testing services.

    Revenue breakup
    (Rs m) 2QFY10 3QFY10 Change
    Based on geography      
    India 17,351 15,319 -11.7%
    US 30,537 29,943 -1.9%
    Europe 13,880 14,623 5.4%
    Rest of the world 7,634 9,749 27.7%
    Based on businesses      
    IT Services 49,957 51,636 3.4%
    IT products 11,834 10,016 -15.4%
    Consumer care &Lighting 5,866 6,010 2.5%
    Others 1,584 2,047 29.2%

  • In terms of geographies, revenues from Wipro’s major market for IT services i.e., the US (43% of the topline) saw a decline of 2% QoQ. India (22%) also declined 12% QoQ during the quarter. However, sales from the European markets (21%) grew by 5.4% QoQ. Sales from rest of the world (14%) surged by 27% QoQ.

    IT services revenue breakup
    (In Rs m) 2QFY10 3QFY10 Change
    Based on service offerings      
    Application development and maintenance 19,833 20,499 3.4%
    Technology infrastructure services 10,291 10,998 6.9%
    Package Implementation 6,644 6,609 -0.5%
    Testing services 5,995 5,938 -0.9%
    BPO 5,245 5,473 4.3%
    Product Engineering 1,948 2,117 8.7%
    Based on verticals      
    Technology, Media and Telecom 13,189 13,477 2.2%
    Financial Services 12,839 13,322 3.8%
    Manufacturing 7,793 7,797 0.0%
    Healthcare services 4,047 4,492 11.0%
    Retail and Transportation 7,593 7,642 0.6%
    Energy and Utilities 4,496 4,905 9.1%

  • Wipro’s operating margins expanded by 0.6% QoQ during 3QFY10. This can be credited to better utilisation levels, cost containment, aided by a push towards offshoring. However, currency fluctuation impacted the margins negatively.

  • Wipro reported a decent 5% QoQ growth in net profits during 3QFY10. This was mainly aided by better operating margins and increased share of profits from associates.

What to expect?
At the current price of Rs 730, the stock is trading at a multiple of 19.1 times our estimated FY12 earnings. The management during the conference call indicated that the there appears to be a continuous improvement in the macro environment, with customers aiming to utilize their IT budgets in deriving transformation and efficiency. Though the budgets are expected to remain flat or a tad positive, the company believes that offshoring will continue to gain momentum. The management's revenue guidance for the next quarter stands in the range of US$ 1,161 m to US$1,183 i.e., around 3% to 5% higher on a sequential basis. The company's IT services business continued to gather traction and registered a volume increase of 4.7% QoQ. It may be noted that company has began to focus on consulting led engagements and has hired around 31 highly experienced industry experts in order to partner with client's top management. This investment in the client relationships front coupled with more local hiring in the overseas markets is expected to significantly push up the sales and marketing cost for the company in the future. However such model will aid it in winning more large and critical projects. The company's non-linear growth initiatives saw a decent up-take and contributed around 8% to the consolidated topline. On back of robust deal pipeline across geographies and industry verticals, the company maintains a positive outlook towards the coming quarters. At current levels, we have a 'HOLD' view on the stock.

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