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Wipro: Muted performance - Views on News from Equitymaster
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Wipro: Muted performance
Jan 21, 2009

Performance summary
  • Topline grows by 1.8% QoQ during 3QFY09, 34% YoY during 9mFY09.
  • Operating margins remain flat at under 20%. While currency movement and aids the margins, salary increase and drop in utilisation masks the positive impact.
  • Bottomline expands by 2.6% QoQ during the quarter, aided by lower taxes and higher earnings from affiliates.
  • Adds 31 new clients in the IT services business during the quarter.
  • Employee strength stands at 97,000 at the end of December 2008.
  • Revenue guidance for 4QFY09 is US$ 1,045 m (including revenue from Citi acquisition)


(Rs m) 2QFY09 3QFY09 Change 9MFY08 9MFY09 Change
Net Sales 65,196 66,343 1.8% 143,278 191,351 33.6%
Expenditure 52,478 53,341 1.6% 114,172 153,827 34.7%
Operating profit (EBDIT) 12,718 13,002 2.2% 29,106 37,524 28.9%
Operating profit margin (%) 19.5% 19.6%   20.3% 19.6%  
Other income 1,451 1,387 -4.4% 2,923 3,897 33.3%
Interest 1,151 1,090 -5.3% 1,221 3,016 147.0%
Depreciation 1,661 1,753 5.5% 3,850 4,993 29.7%
Profit before tax 11,357 11,546 1.7% 26,958 33,412 23.9%
Tax 1,659 1,605 -3.3% 3,150 4,792 52.1%
Minority interest (22) (16)   (8) (50)  
Equity in earnings of affiliates 106 114 7.5% 233 327 40.3%
Profit after tax/(loss) 9,782 10,039 2.6% 24,033 28,897 20.2%
Net profit margin (%) 15.0% 15.1%   16.8% 15.1%  
No. of shares (m)       1,387.0 1,463.5  
Diluted earnings per share (Rs)*         25.8  
P/E ratio (x)*         11.1  
* On a trailing 12-months basis

What has driven performance in 3QFY09?
  • The 1.8% QoQ growth in Wipro’s topline during 3QFY09 was largely led by its IT services business, which contributed 77% of total revenue. However, the overall growth was restricted because of poor performance of product divisions which registered a decline of 17% QoQ and lackluster performance of the consumer care and lighting segment where sales remained flat.

    Segmental performance analysis
    Revenues (Rs m) 2QFY09 3QFY09 Change
    IT Services 47,500 50,792 6.9%
    PBIT Margins 21.0% 20.6%  
    IT products 10,023 8,369 -16.5%
    PBIT Margins 4.3% 5.1%  
    Consumer care &Lighting 5,269 5,270 0.0%
    PBIT Margins 12.2% 11.6%  

  • Despite the ongoing financial crisis and economic slowdown in the US, Wipro has witnessed 9% QoQ growth in business from this region. Growth from European business stood at a very marginal 0.2% QoQ. The management has indicated that it is witnessing favorable approach towards outsourcing from some European countries. These countries are expected to emerge as growth drivers going forward. During the quarter, Wipro strengthened its presence in Europe by setting up its office in Portugal. This is in line with the company’s strategy to build global delivery capabilities and support customers from near shore locations.

    Geographical performance 2QFY09 3QFY09 Change
    India 15,354 13,335 -13.1%
    US 28,112 30,752 9.4%
    Europe 14,638 14,663 0.2%
    Rest of the world 6,969 7,433 6.7%
      65,073 66,183 1.7%

    Wipro’s employee base stood at around 97,000 at the end of December 2008. The company is planning to rationalise its hiring amidst current economic scenario. It is also planning to focus on non-linear growth.

  • Wipro recorded a 0.1% increase in its operating margins during 3QFY09. While depreciation of rupee aided the margins, salary increase and drop in utilisation coupled with lower volume on account of fewer working days in this quarter masked the positive effect.

  • Wipro recorded 2.6% QoQ growth in net profits during 3QFY09. This was mainly on account of higher operating profit and lower tax outgo.

What to expect?
At the current price of Rs 222, the stock is trading at a multiple of 7.4 times our estimated FY11 earnings. Wipro’s nine month performance is ahead of our full year estimates on both the topline and bottomline fronts. The management, like its peers, has indicated caution amidst the ongoing financial and economic crisis across the world. It has also indicated that the company is witnessing pricing pressure as clients are rationalising their budgets. As regards the growth drivers, the management believes that the future growth will come from verticals like manufacturing, health care and utility. However, times will remain challenging for technology, telecom, and banking and financial service segments. Since Wipro looks attractive on a valuation basis, we remain positive on the stock from 2 to 3 years perspective.

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