X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Wipro: What next? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Mar 7, 2005

    Wipro: What next?

    Wipro is the third largest software services exporter from the country, and also has interests in the consumer care and lighting businesses. The largest contribution to its revenues comes from the global IT services and products division (74% of consolidated revenues in FY04). Over the past few years, the company has witnessed a sort of restructuring, whereby it has reduced its dependence on R&D services and has derisked its businesses towards a wide range of software services. In this article, we take a look at how Wipro has performed over the past few years and see where it is headed in the future.

    Riding high on global IT services
    Over the years, the revenues from the global IT services business have steadily increased as a percentage of total consolidated revenues. The table below shows the growth rate of the segment in comparison with the growth rate of the other businesses of the company, like India and Asia Pacific IT Services and Products, Consumer Care and Lighting, Health Care & Life Sciences, and Others.

    Global IT Services: Up, up and away!
    (Rs m) FY01 FY02 Change FY03* Change FY04 Change CAGR
    Global IT Services & Products 17,690 22,909 30% 30,101 31% 43,575 45% 35%
    India & AsiaPac IT Services & Products 8,481 7,368 -13% 8,222 12% 9,762 19% 5%
    Consumer Care & Lighting 3,305 3,012 -9% 2,991 -1% 3,649 22% 3%
    Healthcare & Life Sciences - - - 893 - - - -
    Others 1,446 1,636 13% 1,134 -31% 1,826 61% 8%
    TOTAL 30,922 34,925 13% 43,383 24% 58,812 36% 24%
    * Global IT Services & Products revenues include revenues from Spectramind, the BPO unit of Wipro.
    ** From FY04, the HealthScience business was restructured, and is now part of Global IT Services & Products. Wipro Biomed, a business segment that was reported as part of the HealthScience segment has now been reported as part of Others.

    As can be seen from the above table, the global IT services and products business has grown at a healthy CAGR of 35% during the period FY01 to FY04. The consistency of the growth has also been good, with the growth rates actually increasing from 30% YoY in FY01 to 45% YoY in FY04. This has been on account of several factors like an increase in global technology spending, preference for India as a low-cost and high skills base for outsourcing functions, an upturn in the global telecom industry – a vertical from which Wipro obtains a significant part of its revenues - increasing competition worldwide, resulting in companies needing to become more efficient, and thus spending more on technology, and an improving business mix.

    As a percentage of revenues, the share of global IT services & products has risen from about 57% of total revenues in FY01 to around 74% in FY04. The business accounts for as much as 85% of consolidated operating profits. Clearly, the growth of other businesses have been modest as compared to the IT services business. The consistency factor has also not been there for the other business, resulting in these growing at a slow rate, and thus, reducing their share in total revenues of the company.

    Well-diversified portfolio
    Wipro's global IT services division has a very well diversified revenue base, through servicing of a large number of verticals, as can be seen in the chart below. It is not overly dependent upon one or two verticals for business, and thus, in case of a downturn in a few industries, and a resultant hit on technology spending in those industries, the company serves a well-diversified portfolio of verticals to cushion it from any adverse impact.

    ES & PI: Embedded Systems & Product Engineering
    T & I: Telecom & Internetworking

    Geographic diversification
    Wipro has a reasonably well-diversified geographic revenue break-up, compared to its peers like Infosys and TCS. Like both of its illustrious peers, Wipro also derives the lion's share of its revenues from the US market, but it is considerably less dependent on the same than Infosys and TCS. Infosys derives around 70% of revenues from the US markets, while TCS derives around 62% of revenues. Wipro's dependence on the US market has come down significantly in the last year, from around 66% in FY04 to 54% in the period to 9mFY05. The balance is split evenly between India and the rest of the world. Thus, the geographical break-up of its revenues has become more favourable over a period of time, and this is a good sign for Wipro and its investors, as the company benefits from a de-risked business model.

    War chest for inorganic growth
    The past two years have seen Wipro being at the front of growing its businesses inorganically and has made a slew of successful acquisitions. And these have been made possible by a pretty comfortable cash flow position for the company. For instance, in FY04, Wipro generated cash flows from operations of over Rs 10 bn. Having strong cash flows is particularly important in the industry in which Wipro operates, since there is a constant need to scale up operations, expand further into new geographies, and tap ever-increasing business coming India's way from the ever-increasing need for global corporations to cut costs and become more competitive, thus giving more business to low cost-high quality destinations like India. As a matter of fact, Wipro had cash, cash equivalents and liquid investments of Rs 21.7 bn at the end of FY04.

    Looking ahead…
    Going forward, given the size and scalability that Wipro has built under the able leadership of its visionary management, we expect it to be one of the major beneficiaries of the Indian offshoring story as it gradually unfolds. Wipro has also reduced its dependence on R&D outsourcing over the years, which is a high-risk and highly volatile revenue stream. The fact that the company had also acquired Spectramind, which is its BPO unit, in order to take advantage of the outsourcing story, is another positive in the company's favour.

    While there has been a margin expansion in the recent quarters, readers should note the fact that this happened on a low base as the company had to bear high integration costs in the previous quarters on account of the several acquisitions that it had made. However, given the fact that the company will have to constantly scale up its business, we believe that it will be difficult for it to maintain margins. Wipro also has a low floating stock (84% stake is held by promoters) compared to peers like Infosys, and as a result, price discovery could be skewed to that extent. This is one of the reasons why the stock has traditionally traded at high valuations. Currently, the stock is trading at a price to earnings multiple of close to 30 times annualised 9mFY05 earnings. Given these factors, to that extent, there is a risk.

     

     

    Equitymaster requests your view! Post a comment on "Wipro: What next?". Click here!

      
     

    More Views on News

    Wipro: A Decent Start to the Year (Quarterly Results Update - Detailed)

    Jul 27, 2017

    Digital services drive growth for Wipro in 1QFY18.

    Wipro: A Good Performance (Quarterly Results Update - Detailed)

    May 4, 2017

    Acquisitions and digital services aid growth.

    Wipro: Another Flat Quarter (Quarterly Results Update - Detailed)

    Feb 9, 2017

    Wipro has reported a 1% QoQ decrease in the consolidated topline and a 1.9% QoQ increase in the consolidated bottomline for the quarter ended December 2016.

    Tech Mahindra: Our Revised View (Quarterly Results Update - Detailed)

    Aug 2, 2017

    A better than expected turnaround in performance results in a change in view.

    Infosys: A Decent Start to FY18 (Quarterly Results Update - Detailed)

    Jul 14, 2017

    Infosys starts FY18 on an encouraging note with a stable performance.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    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: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    WIPRO SHARE PRICE


    Aug 18, 2017 (Close)

    TRACK WIPRO

    WIPRO 5-YR ANALYSIS

    Detailed Financial Information With Charts

    COMPARE WIPRO WITH

    MARKET STATS