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Wipro: Advantage size - Views on News from Equitymaster
 
 
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  • Apr 18, 2002

    Wipro: Advantage size

    Wipro has indicated that it is likely to report a 4% sequential decline in revenues from its Global IT services business (Wipro Technologies) in 4QFY02. Considering the tough times, the software industry is facing, this translates to a significant 29% growth in revenues in FY02 for Wipro Technologies. The most interesting aspect is that the company owes a large part of this splendid performance to a single deal.

    Wipro has traditionally been dominant in the technology space where most of it its clients were the telecom equipment manufacturers like Cisco and Nortel. These ‘engines of the new economy’ were worst hit due to the technology meltdown. Consequently, business flow to Wipro suffered. The company swiftly moved to focusing on telecom and Internet service providers. And it is from this space Wipro in 1QFY02 bagged one of the largest contracts for the Indian software industry. The contract was worth US$ 70 m (Rs 3 bn) from a telecom subsidiary of Lattice Group Plc. The contract is expected to have contributed US$ 30 m (Rs 1 bn) to Wipro's revenues in FY02. Excluding this contract, the company’s growth would have been higher by 23% for FY02.

    Service providers to the rescue
    R&D group (% contribution) 1QFY02 2QFY02 3QFY02 9mFY02
    Telecom and Internet working 58% 48% 37% 47%
    Embedded Systems and Internet Access 37% 29% 29% 31%
    Telecom and Internet Providers 6% 23% 33% 21%
    Total 100% 100% 100% 100%

    While this indicates a certain degree of recognition and credibility the Indian software industry has gained, the veiled fact is that contracts of such size could become more commonplace going forward. To put things into perspective, the contracts that Indian software companies get are usually lower than US$ 10 m in size.

    A recent partnership between Wipro and IBM made the bourses sit up and take notice. While Wipro already has partnership with the worlds largest IT company for selling hardware, what interested the markets was that there was a hint of the relationship extending into software services. Unable to compete with the pricing power of Indian IT services companies, global majors are looking towards setting up offshore operations in India or partnering with Indian IT services majors.

    Wipro continued to bet strong on Bluetooth, a technology that helps various home appliances communicate with each other. While the technology has been slow to gain popularity. Wipro, however, has swift in developing expertise in the space to be prepared for tomorrow, ahead of others. Wireless access to the Internet and communication among various devices is expected to be the driver for the next wave of technology spending.

    In September 2001, Wipro became the second company in the world to have all thirteen Bluetooth profiles (Version 1.1) with product qualification status from the Bluetooth Qualification Body (BQB). In 4QFY02, Wipro entered into a partnership with austriamicrosystems. Both the companies will combine their Bluetooth expertise to jointly produce and market chipsets for the emerging Bluetooth wireless market. Wipro has entered into the Bluetooth product space with this alliance. Thus, becoming a one-stop-shop solutions provider for the Bluetooth market.

    During the quarter, the company also announced the commercial availability of its Home Gateway Software suite. Home Gateway devices provide the necessary connectivity features to enable various home appliances and devices to communicate and network. Wipro's Home Gateway suite of software solutions enables various in-house intelligent devices to be connected to the broadband network. Some of the applications enabled by the Home Gateway device are virtual private network connectivity, Internet sharing, video on demand, IP telephony and home security and surveillance.

    In 3QFY02, Wipro also announced a tie up with Geometric Software. They have entered into a strategic alliance for providing end-to-end IT solutions to industrial markets in US, Europe and Japan. Wipro is the traditional software service company with strong expertise in application development, maintenance and integration. While Geometric will provide solutions related to geometry, Wipro will help integrate these solutions with the enterprise systems. There is another aspect involved in the partnership, i.e. logistics. Geometric can now reach clients through Wipro’s presence in geographies like Europe where it does not have much of a presence. This move would give Wipro a strong edge in the engineering services markets. The service offering that has shown the steepest growth amongst Infosys revenue streams for 9mFY02 is, engineering services.

    (Rs m) 4QFY01 4QFY02E Change FY01 FY02E Change
    Net Sales (Gross - Excise) 9,212 9,582 4.0% 30,539 34,893 14.3%
    Other income 176 118 -33.1% 383 645 68.3%
    Expenditure 6,627 6,851 3.4% 22,529 24,850 10.3%
    Operating Profit (EBDIT) 2,585 2,731 5.6% 8,010 10,043 25.4%
    Operating Margin (%) 28.1% 28.5%   26.2% 28.8%  
    Interest (107) 30 - (241) (162) -32.8%
    Depreciation 314 431 37.3% 979 1,470 50.2%
    Profit before tax 2,554 2,387 -6.5% 7,655 9,379 50.2%
    Extraordinary income/(expense) 16 -   16 -  
    Tax 395 208 -47.4% 992 743 -25.1%
    Profit after tax 2,175 2,180 0.2% 6,663 8,637 29.6%
    Net profit margin (%) 23.6% 22.7% 5.2% 21.8% 24.8%  
    No of shares 232.5 232.5   232.5 232.5  
    FDEPS* 37.4 37.5   28.7 37.1  
    P/E (X)   47.5     48.3  
    * annualised            

    Apart from IT services Wipro has a significant interest in hardware. FY02 was not a good year for the hardware business. According to figures released by MAIT (Manufacturers Association of Information Technology), the economic slowdown has impacted PC sales adversely causing a YoY decline of 4% in volumes in the first half of fiscal 2002. This is contrary to the trend in FY01, during which the PC markets witnessed a steep 34% volume growth. Infact so sharp has been the decline in 1HFY02 that MAIT has revised its forecast for the PC markets from a growth of 30% to a decline of 12% for FY02.

    The decline in value terms in 1HFY02 has been even steeper at 23%. This was due to the fact that for 1HFY02 PC sales have shown a sharp drop in realisations. The average realisation per PC declined to Rs 27, 520 a drop of 20% as compared to the corresponding period last year.

    Taking a clue from the trend seen for hardware sales we expect revenues of Wipro Infotech (India and Asia Pacific IT services and products), to decline by 7% on a YoY basis. However, the contribution of this division will be higher for 4Q, as the business is seasonal in nature. The increased contribution to the revenues from this segment will cause Wipro’s operating margins to head south.

    Average price realisation growth (QoQ) 1QFY02 2QFY02 3QFY02
    Onsite 2.6% 4.6% 1.5%
    Offshore 3.4% 2.5% 2.3%
    New clients added 25 27 27

    Wipro has chosen to differentiate itself from the rest of the pack by not giving into the price war. The company managed to added significant number of new clients through out the year at higher price points. Clients choosing to work with the company at higher rates, especially at a time when billing rates have been plummeting is a confirmation of the company’s quality of services. Wipro by sacrificing growth for quality has shown the way to the Indian IT services industry that for some reason is fascinated by the ‘lower-cost’ selling proposition. However, it’s a question of time before Wipro succumbs to the pricing pressure. Unless of course, there is a general improvement in the situation.

     

     

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