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Wipro: IT services feel the pinch

Apr 22, 2009

Performance summary
  • Topline grows by 28% YoY during FY09, declines by 2.3% sequentially during 4QFY09. Revenues from the IT services business record a 3% QoQ decline during the quarter. FY09 revenue figure higher by 12% as compared to our estimates.
  • Operating margins remain flat at under 20%.
  • Net profits grow by 19% YoY during the fiscal, remains flat during the quarter owing to decline in other income on the back of forex losses. FY09 profit figure higher by 16% as compared to our estimates.
  • Adds 110 new clients during the fiscal.
  • Revenue guidance for IT service business for 1QFY10 is US$ 1,009 m to US$ 1,025 m.
  • Recommends a final dividend of Rs 4 per share.

Consolidated financial performance snapshot
(Rs m) 3QFY09 4QFY09 Change FY08 FY09 Change
Net Sales 66,343 64,821 -2.3% 200,397 256,171 27.8%
Expenditure 53,341 51,330 -3.8% 159,852 205,156 28.3%
Operating profit (EBDIT) 13,002 13,491 3.8% 40,545 51,015 25.8%
Operating profit margin (%) 19.6% 20.8% 20.2% 19.9%
Other income 1,387 1,011 -27.1% 3,775 4,910 30.1%
Interest 1,090 848 -22.2% 1,892 3,865 104.3%
Depreciation 1,753 1,872 6.8% 5,358 6,864 28.1%
Profit before tax 11,546 11,782 2.0% 37,070 45,196 21.9%
Tax 1,605 1,667 3.9% 4,550 6,460 42.0%
Minority interest (16) (50) (24) (99)
Equity in earnings of affiliates 114 35 -69.3% 333 362 8.7%
Profit after tax/(loss) 10,039 10,100 0.6% 32,829 38,999 18.8%
Net profit margin (%) 15.1% 15.6% 16.4% 15.2%
No. of shares (m) 1,461.5 1,464.9
Diluted earnings per share (Rs) 26.6
P/E ratio (x) 10.9

What has driven performance in FY09?
  • Wipro recorded a 28% YoY growth in topline during FY09. This was led by all round growth in its IT services, IT product, and consumer care and lightning businesses. While the IT services and IT product businesses grew by 31% each, the consumer care and lighting business grew by 37% during the year. The full-year performance would have been better but for the pressure the company faced during 4QFY09, wherein it recorded s sales decline of 2.3% QoQ on account of decline in revenue from the IT services business (down 3% QoQ).

    As regards the company’s business verticals, the manufacturing and healthcare segments witnessed significant traction during FY09. In its conference call, the management has indicated that these verticals along with the retail and consumer product verticals are expected to drive growth for the company in the future. However, banking & financial service, technology, and telecom verticals are likely to be laggards.

    Segmental performance analysis
      FY08 FY09 Change
      % share Rs m % share Rs m % YoY
    India 24.0% 48,095 21.0% 53,796 11.9%
    US 44.0% 88,175 45.0% 115,277 30.7%
    Europe 24.0% 48,095 22.0% 56,358 17.2%
    Rest of the world 8.0% 16,032 12.0% 30,741 91.7%

  • Amidst the ongoing recession in the US, Wipro witnessed a strong 31% YoY growth in business from this region during FY09. The European region also registered a decent growth of 17% YoY. As far as its India operations are concerned, sales grew by 12% YoY. The management has indicated that it is witnessing favorable approach towards outsourcing from some European countries. It has also indicated that its effort of diversifying across the geographies is paying off now. Geographies like India, Middle East and Australia are expected to emerge as growth drivers going forward.

    Geographical performance
    Revenues (Rs m) FY08 FY09 Change
    IT Services 146,626 191,661 30.7%
    PBIT margins 21.3% 21.0% -1.4%
    IT products 26,400 34,552 30.9%
    PBIT margins 4.6% 4.3% -7.8%
    Consumer care &Lighting 15,207 20,830 37.0%
    PBIT margins 12.5% 12.2% -2.1%

  • Wipro recorded a 0.3% decline in its operating margins during FY09. While depreciation of rupee aided the margins, increase in costs affected margins negatively.

  • Wipro recorded a 19% YoY growth in net profits during FY09. This was mainly on account of higher operating profits and other income earned on investment. It may be noted that the rise in other income has come despite the significant forex losses that the company had to book during the year.

What to expect?
At the current price of Rs 290, the stock is trading at a multiple of 9.4 times our estimated FY11 earnings. Wipro’s performance is ahead of our estimates on both the topline and bottomline fronts. The management, unlike its peers, sounded confident amidst the economic slowdown across the world. It indicated during the conference call that it has been able to improve upon its pricing mainly on account of its focus on fixed price projects. However, it has also indicated that the company might witness pricing pressure if economic scenario worsens and clients rationalise their budgets. As regards the growth drivers, the management believes that future growth will come from verticals like manufacturing, healthcare and retail. Furthermore, the company’s good deal pipeline gives it a good visibility for future growth.

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