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Wipro: No surprises

Apr 19, 2002

Wipro’s results for 4QFY02 are inline with expectations. The company has reported a 1.4% YoY, growth in net profits and a 0.7% growth in revenues for 4QFY02. For the full year FY02, Wipro has posted a rise of 30% in net profits. The growth in topline is 13.4%. The Global IT Services (Wipro Technologies) consolidated revenues have declined by 3% sequentially (QoQ) in line with the guidance given by the company. Wipro expects revenues from this division to rise by 2% sequentially in 1QFY03.

(Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Net Sales (Gross - Excise) 9,212 9,273 0.7% 30,539 34,677 13.5%
Other income 176 228 29.5% 383 875 128.5%
Expenditure 6,627 6,601 -0.4% 22,529 24,603 9.2%
Operating Profit (EBDIT) 2,585 2,672 3.4% 8,010 10,074 25.8%
Operating Margin (%) 28.1% 28.8%   26.2% 29.1%  
Interest (107) 10 - (241) 29 -112.0%
Depreciation 314 380 21.0% 979 1,419 44.9%
Profit before tax 2,554 2,510 -1.7% 7,655 9,501 44.9%
Extraordinary income/(expense) 16 -   16 -  
Tax 395 304 -23.0% 992 840 -15.3%
Profit after tax 2,175 2,206 1.4% 6,679 8,661 29.7%
Net profit margin (%) 23.6% 23.8%   21.9% 25.0%  
No of shares 232.5 232.5   232.5 232.5  
FDEPS* 37.4 38.0   28.7 37.3  
P/E (X)   46.9     48.2  
* annualised            

The Wipro Pie
The company managed to improve operating margins in 4QFY02 as compared to the corresponding quarter last fiscal. This is due to the increased contribution of revenues from Wipro Technologies. While Wipro Technologies contributed 63% to the revenues (55% in 4QFY01) and the contribution of Wipro Infotech was 25% (30% in 4QFY01). Consumer Care and Lighting held on to its share of the revenues at 8%. The contribution from other businesses almost halved from 7% in 4QFY01 to 4% in 4QFY02.

For the full year FY02, the share of Wipro Technologies increased significantly from 57% to 66%, due to a 28% rise in revenues. Revenues from Wipro Infotech and Consumer Care and Lighting divisions declined by 13% and 9% respectively. Consequently, the contribution to revenues declined from 27% to 21% for Wipro Infotech and from 11% to 9% for Consumer Care and Lighting in FY02.

Wipro Technologies
While the revenues from Wipro Technologies declined sequentially for 4QFY02 inline with the company’s guidance, the reason for concern is the fact that operating margins have declined from 34% in 3QFY02 to 32% in 4QFY02.

Though the company managed to negotiate a 12% improvement in billing rates for offshore projects and 15% for onsite projects in FY02, lower margins on product revenues and fall in utilisation caused the margins decline.

The R&D services group and the enterprise solutions group contributed equally to the revenues of Wipro Technologies. Within the R&D services group, the telecom and Internet service provider practice saw a share increase from 3% in FY01 to 10% in FY02. This is due a US$ 75 m contract the company bagged in 1QFY02. Contribution from embedded and Internet accesses practices, however, saw a marginal decline from 20% to 17%. However, the share of Telecom and Internet working practice fell sharply from 31% to 23%. This segment addresses the telecom equipment manufacturers that have been the hardest hit due to the technology meltdown.

Wipro Technologies FY01 FY02 Change
Telecom and Internet working 31.0% 23.0% -3.9%
Embedded Systems and Internet Access 20.0% 17.0% 10.1%
Telecom and Internet Service Providers 3.0% 10.0% 331.7%
Total (R&D Group) 54.0% 50.0% 19.9%
Enterprise solutions 41.0% 50.0% 57.9%
Support Services 5% - -
Total 100.0% 100.0% 27.6%

Adding new services like systems integration, package implementation and focus on the enterprise solutions markets helped Wipro Technologies clock a strong 28% growth in FY02 revenues. This is higher than the industry figure, which is expected to be in the range of 20% to 22%.

Geographical break up FY01 FY02 Change
Europe 29% 36% 60.8%
North America 64% 57% 15.3%
Japan 5% 6% 55.4%

The large project win from the Internet & telecom services provider space was from the Lattice Group, which is located in Europe. Consequently, the revenues from the European geography grew the fastest. The growth in revenues from the US was subdued on account of the economic slowdown in the region.

Wipro added 29 new clients (27 in 3QFY02) in 4QFY02, taking the total number of client additions during FY02 to 107. Of these 23 clients had annual billing of more than US$ 5 m. This is a significant increase from 15 such clients in FY01. This points to the fact that the company is increasingly getting larger contracts and clients are comfortable to work on more mission critical projects with the company. Wipro bagged 7 systems integration contracts and 15 infrastructure management contracts in 4QFY02.

The onsite offshore ratio did not change for FY02. Wipro earned 48% of the revenues in FY02 from offshore projects. Increasing the contribution of offshore projects could help Wipro improve operating margins in the future.

Wipro Infotech
Wipro Infotech saw a 13% decline in revenues for FY02. The operating margins also declined from 9.5% in FY01 to 8% in FY02. The fiscal 02 was a bad year for the hardware business as the domestic economy slowed down and the demand for hardware was subdued. The group has been focusing on services for future growth. Consequently, the contribution to revenues from services increased from 22% in FY01 to 28%. Wipro Infotech won projects in the area of ERP implementation, transport optimization, HR information systems and IT consulting projects.

At the current market price of Rs 1,836, the stock is trading at a P/E multiple of 49x its 2QFY02 annualised earnings. Wipro’s stock price has significant growth component factored in. The management not providing a full year guidance may have negatively impacted the valuations.

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