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Wipro: Weak quarter, strong year - Views on News from Equitymaster
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Wipro: Weak quarter, strong year
Apr 23, 2010

Wipro has announced its FY10 results. The company has reported a 6% YoY and 19% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales remain flat during 4QFY10, primarily on account of muted performance from the IT services and IT product segments. FY10 sales rise by 6% YoY.
  • Operating margins decline by 0.5% QoQ during 4QFY10, but expand by 2% YoY during FY10.
  • This is on the back of cost containment measures and improved volumes.
  • Net profits decline by 1% QoQ during the quarter on account of margin contraction and increased tax outlay. Profits increase by 19% YoY during FY10 on the back of improved margins and lower interest cost.
  • Employee strength of the IT services business stood at 108,071 at the end of March 2010. IT services added 5,325 (net) employees during 4QFY10.
  • IT services adds 27 new clients during the quarter and 121 customers in FY10, taking the total count of active customers to 845.
  • Recommends a final dividend of Rs 6 per share. Also recommends bonus shares in the ratio of 2 additional shares for every 3 shares held.


Consolidated financial performance
(Rs m) 3QFY10 4QFY10 Change FY09 FY10 Change
Net Sales 69,634 69,829 0.3% 255,338 271,241 6.2%
Expenditure 54,090 54,578 0.9% 205,090 211,900 3.3%
Operating profit (EBDIT) 15,544 15,251 -1.9% 50,248 59,341 18.1%
Operating profit margin (%) 22.3% 21.8%   19.7% 21.9%  
Other income 924 1,270 37.4% 5,058 4,360 -13.8%
Interest 219 (342)   3,824 990 -74.1%
Depreciation 1,923 1,887 -1.9% 6,949 7,831 12.7%
Profit before tax 14,326 14,976 4.5% 44,533 54,880 23.2%
Tax 2,291 3,015 31.6% 6,035 9,294 54.0%
Minority interest (31) (46)   (99) (185) 86.9%
Equity in earnings of affiliates 170 176 3.5% 362 530 46.4%
Profit after tax/(loss) 12,174 12,091 -0.7% 38,761 45,931 18.5%
Net profit margin (%) 17.5% 17.3%   15.2% 16.9%  
No. of shares (m)       1,464.7 1,468.2  
Diluted earnings per share (Rs)*         31.3  
P/E ratio (x)*         22.6  
* On a trailing 12-months basis

What has driven performance in FY10?
  • Wipro’s topline grew marginally by 0.3% QoQ during 4QFY10. This was on account of muted performance in the IT services and products businesses particularly in the US. Despite a 4% volume growth, the performance remained muted due to adverse currency movement. Nevertheless, the company registered a 6% YoY growth in topline during FY10. This was on the back of broad based volume growth led by the software division. The IT services business, which contributed 75% to total sales, grew by 2% QoQ in 4QFY10 and a decent 6% YoY during FY10. The IT products business (14% of sales) saw a sequential decline of 11% during 4QFY10, but a robust 12% increase for entire FY10.

    Further, Wipro’s consumer care and lighting business (8% of sales) grew by around 1% QoQ during 4QFY10 and 17% YoY during FY10. In terms of industry verticals, the company registered robust business in the healthcare services, retail & transportation and energy and utilities verticals, which contributed nearly 9% and 15% and 9% respectively to the consolidated IT services revenue during FY10. The company also witnessed an uptick in demand in the financial services and manufacturing segments. However, performance remained muted for technology, media and telecom segment which constitute around 26% of Wipro’s consolidated topline. The company witnessed a decent performance for its package implementation and infrastructure services. However, during FY10, the performance remained muted for application development and maintenance and product engineering segments. Nevertheless, 4QFY10 saw a positive growth across all business offerings.

    IT services revenue breakup
    (In Rs m) 3QFY10 4QFY10 Change
    Based on service offerings      
    Application development and maintenance 20,499 20,512 0.1%
    Technology infrastructure services 10,998 11,361 3.3%
    Package Implementation 6,609 6,680 1.1%
    Testing services 5,938 6,206 4.5%
    BPO 5,473 5,575 1.9%
    Product Engineering 2,117 2,209 4.3%
    Based on verticals      
    Technology, Media and Telecom 13,477 13,465 -0.1%
    Financial Services 13,322 13,675 2.6%
    Manufacturing 7,797 7,995 2.5%
    Healthcare services 4,492 4,471 -0.5%
    Retail and Transportation 7,642 7,889 3.2%
    Energy and Utilities 4,905 4,786 -2.4%

  • In terms of geographies, revenues from Wipro’s major market for IT services i.e., the US (44% of sales) saw a growth of 4% YoY during FY10. India (23%) is emerging as a significant market and grew by 16% YoY during FY10. Sales from rest of the world (12%) increased by 6% YoY during FY10.

    Revenue breakup
    (Rs m) 3QFY10 4QFY10 Change
    Based on geography      
    India 14,623 16,759 14.6%
    US 32,728 30,725 -6.1%
    Europe 14,623 15,362 5.1%
    Rest of the world 7,660 6,983 -8.8%
    Based on businesses      
    IT Services 51,636 52,596 1.9%
    IT products 10,016 8,900 -11.1%
    Consumer care &Lighting 6,010 6,084 1.2%
    Others 2,047 2,249 9.9%

  • Wipro’s operating margins declined by 0.5% QoQ during 4QFY10. This was on account of wage hike and currency volatility. During FY10, operating margins improved by 2% YoY on back of better utilisation levels, cost containment, aided by a push towards offshoring.

  • Wipro’s net profit declined by 1% QoQ during 4QFY10 due to contraction of operating margins. Nevertheless, profits grew by 19% YoY during FY10 on the back of increased volumes and better operating efficiency.

What to expect?
At the current price of Rs 702, the stock is trading at a multiple of 18.5 times our estimated FY12 earnings

The management of the company has hinted that the overall business environment for Wipro is getting better with each passing quarter. It is enthused with the confidence and optimism seen among its clients. The company eyes broad-based volume-led business growth across its business lines. For the IT services business, unlike deferment of IT spending witnessed during the early part of FY10, the company expects its clients to actually spend their IT budgets in time in FY11. Moreover, budgets are expected to increase by 2% to 3% YoY. There is a pickup in discretionary spending as clients begin to invest for future and in business transformation. The company won several large deals in this area during FY10.

The pricing has more or less stabilized for the IT services business. Its focus on non-linear revenue growth along with more value-added services has also resulted in better realisation. Going forward, we expect the company to benefit from focus on client mining and newer business models which are a win-win for Wipro as well as its clients. The margins can be strained given its hiring of more local nationals at its client geographies and overall increase in head count and employee cost. At the current levels, we have a cautious view on the stock.

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