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Wipro: Acquisitions aid growth - Views on News from Equitymaster

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Wipro: Acquisitions aid growth
Apr 18, 2008

Performance summary
  • Topline grows 33% YoY in FY08, 8% QoQ in 4QFY08. Global IT services lead charge with 23% YoY growth in sales. Sales higher by 13% as compared to our estimates.

  • Operating margins contract by 2.9% in FY08. Impact has been largely on account of the rupee’s 11% YoY appreciation against the US dollar (for IT services business) and higher material costs (for consumer care business).

  • Net profits grow 12% YoY during FY08, exactly in line with our estimates. Growth relatively lesser than topline growth on account of lower operating margins and a sharp rise in interest expense. Bottomline growth for the fourth quarter stands at 3% QoQ, this one impacted by lower other income.

  • Recommends final dividend of Rs 4 per share (dividend yield of 0.9%).

Financial performance (Consolidated): A snapshot
(Rs m) 3QFY08 4QFY08 Change FY07 FY08 Change
Net Sales 52,706 57,156 8.4% 149,982 199,796 33.2%
Expenditure 42,533 45,680 7.4% 115,623 159,852 38.3%
Operating profit (EBDIT) 10,173 11,476 12.8% 34,359 39,944 16.3%
Operating profit margin (%) 19.3% 20.1%   22.9% 20.0%  
Other income 1,626 616 -62.1% 2,732 4,174 52.8%
Interest 760 469 -38.3% 124 1,690 1262.9%
Depreciation 1,428 1,508 5.6% 3,979 5,358 34.7%
Profit before tax 9,611 10,115 5.2% 32,988 37,070 12.4%
Tax 1,100 1,399 27.2% 3,868 4,550 17.6%
Minority interest 11 16 45.5% (6) 24  
Equity in earnings of affiliates 40 100 150.0% 295 333 12.9%
Profit after tax/(loss) 8,540 8,800 3.0% 29,421 32,829 11.6%
Net profit margin (%) 16.2% 15.4%   19.6% 16.4%  
No. of shares (m)       1,441.5 1,458.3  
Diluted earnings per share (Rs)         22.5  
P/E ratio (x)         20.4  

What has driven performance in FY08?
  • Wipro’s strong performance on the topline front during FY08 was aided by robust sales growth for all its business segments. However, the global IT services division yet again stole the show with a 23% YoY growth. Within this segment, the fastest growth was recorded by the BPO business, which grew sales by 23% YoY. Growth for the IT services business was also aided by the company’s September 2007 acquisition of Infocrossing, which is a US-based provider of IT infrastructure management, enterprise application and BPO services. The purchase consideration for this acquisition was US$ 436 m and it contributed around 4% to the segment’s revenues during the fiscal.

    Segmental performance analysis
      Revenue breakup Operating margins
    (Rs m) FY07 FY08 Change FY07 FY08
    Global IT services 110,843 136,417 23.1% 24.0% 22.0%
    IT Services 101,454 119,556 17.8% 24.0% 22.0%
    Acquisitions - 5,291   - 7.0%
    BPO Services 9,389 11,570 23.2% 23.0% 22.0%
    Wipro Infotech 24,783 37,456 51.1% 9.0% 8.0%
    Consumer Care & Lighting 8,160 15,207 86.4% 12.0% 12.0%
    Others 7,022 11,691 66.5% NA NA

    The benefits of inorganic growth were also seen in Wipro’s consumer care & lighting business (CC&L), where sales grew by 86% YoY during the fiscal. In this segment, the company had acquired the Singapore-based FMCG firm, Unza in August 2007. Wipro paid US$ 246 m for this acquisition and it (Unza) formed around 32% of the CC&L segment’s revenues during the year. As a matter of fact, Unza is one of South Asia’s largest independent manufacturers and marketers of personal care products and has operations in over 40 countries. Excluding Unza’s sales, the CC&L segment grew sales by 27% YoY during FY08. Wipro’s third leading business of India & Asia-Pacific IT services (Wipro Infotech) grew its sales by 51% YoY during the fiscal.

  • On the clientele front, the company’s Global IT services and products business added 29 clients during 4QFY08. On the manpower front, Wipro added a net of 2,290 employees during the quarter (including 371 people in its BPO operations), thus taking the count to over 82,100 employees at the end of March 2008.

  • Wipro recorded a 2.9% YoY reduction in its operating margins during FY08. This was chiefly on account of the rupee’s 11% YoY appreciation against the US dollar. Pressure on operating profitability was especially seen in the IT services business, where operating margins dropped to 22% in FY08, from 24% in FY07.

  • On account of the contraction in operating margins as also a sharp increase in interest expenses, Wipro managed only 12% YoY growth in net profits for FY08. The bottomline picture would have been worse but for a 53% YoY rise in other income, which was a result of high interest income. The company has a huge cash balance (cash and liquid investments) to the tune of US$ 1.3 bn, which has earned it such high other income during FY08. The company interest expenses increased by almost 13 times on account of the loans that it had taken on its books for funding the acquisitions of Infocrossing and Unza. As a matter of fact, Wipro’s loan book (secured and unsecured) increased from Rs 3.8 bn in FY07 to Rs 44.8 bn at the end of FY08.

What to expect?
At the current price of Rs 459, the stock is trading at a multiple of 15.3 times our estimated FY10 earnings. The management has indicated of improving margins in the coming quarters on the back of initiatives like operational improvement, increased offshore contribution and higher utilisation levels. However, in line with what its peers have been talking about, Wipro’s management has also indicated that things shall look positive in the IT services business after a couple of quarters of slowdown going forward. As for the CC&L segment, the company is focusing on brand building to improve revenue visibility and profitability going forward. While increased competition from global technology vendors remains an issue, the management sees strong offshoring momentum to help it grow sustainably over the next few years. We shall soon update our research report on the company with FY08 actual numbers as also incorporating estimates for FY11.

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