Intel recently introduced new programmable network processors that will help telecom equipment manufactures (telcos) cut cost. The new chips will be able to run a variety of software as compared those in the past that were not flexible. This will help telcos like Cisco, Nortel and Lucent cut replacement cost for obsolete equipments as the same device can be upgraded by modifying the software. This is sure to interest telcos, especially, at a time when they are going through a rough patch.
Telcos have been a miserable lot for quite sometime now. The providers of ‘building blocks’ (routers and switches) of the new economy were perhaps the largest beneficiaries of the IT spending bubble. When the going was good, these companies ramped up capacity i.e. employed more people and venture into a number of products. And then came the IT meltdown. While the anticipated revenues never came in, the companies were sitting with increased costs. Therefore, the immediate priority was to cut costs, which meant selling off businesses and of course layoffs.
The ever-burgeoning need for bandwidth means that the devices have to work faster. Therefore, tasks like security screening are also being performed by the chip to save time. However, for the new chips to be popular, software that provide flexibility to chips have to be easily available. Intel is investing significant amount of money to assist software developers for developing the required applications. This is where Wipro steps in.
Wipro will develop total networking solutions based on Intel’s new network processors. The gamut of service offerings include system design, architecting and performance measurement support. The company’s familiarity with Intel processors gives it an edge over others. Also, its significant experience in the area could help the telcos reduce time to market for their new products. The market potential for network processors is immense. According to The Yankee Group (market research firm), the market for network processors is expected to witness a compound annual growth rate (CAGR) of 66% over five years, from US $ 200 m (Rs 9 bn) in 2000 to US $2.5 bn (Rs 120 bn) by 2005. Thus, Wipro could look for strong growth in revenues from the area.
Wipro figures in the select list of Indian companies that have chosen to address the software requirements of the networking and communications markets. Wipro Technologies, the global IT services arm of Wipro Ltd., earns 51% of its revenues from the R&D space. The revenues of the R&D services group are almost distributed equally among the three sub groups. Due to slowdown in the US economy, the revenues from the embedded systems and Internet access group have declined sequentially for the past two quarters consecutively. This is because the clients from this space are mostly telcos.
Wipro: Taking the road less traveled
The network processor solutions could bring some relief to Wipro embedded systems and Internet access group. However, the business environment for its clients continues to be weak. Wipro with its offshore capabilities has the low cost advantage and therefore, can pursue a cost leadership strategy. While pricing power gives Wipro an advantage over its foreign competitors, it does not have much of a competition from the Indian software industry. In the long run Wipro’s strategy to focus on technology related software is likely to be a growth driver. Though for the present, revenues from this stream continue to be uncertain. At the current market price of Rs 1,750, the stock is trading at a P/E multiple of 47x its 3QFY02 annualised earnings. The company’s valuation is one of the highest amongst the software stocks. Unless the US economy turns around, it is unlikely that Wipro will be able to grow at a pace to support this valuation in the near future.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407