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Wipro: A strong year end - Views on News from Equitymaster
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Wipro: A strong year end
Apr 29, 2014

Wipro has announced its results for the fourth quarter and full year 2013-2014. The company has reported a 3.4% QoQ growth in sales and a 10.5% QoQ growth in net profits. Here is our analysis of the results.

Performance summary
  • Consolidated net sales grew by 3.4% QoQ during the quarter.
  • Operating margin improved by 1.2% QoQ to 24.2% during the quarter as compared to 23% seen during 3QFY14. On an absolute basis, the operating profit grew by 8.7% QoQ in the quarter.
  • Net profits grew by 10.5% QoQ. The high sequential growth in net profits was largely attributable to the strong operating performance.
  • The company has paid a final dividend of Rs 5 per share.

Consolidated financial performance
(Rs m) 3QFY14 4QFY14 Change FY13 FY14 Change
Gross revenues 112,713 116,535 3.4% 374,256 434,269 16.0%
Expenditure 86,790 88,355 1.8% 296,997 337,168 13.5%
Operating profit (EBITDA) 25,923 28,180 8.7% 77,259 97,101 25.7%
Operating profit margin (%) 23.0% 24.2%   20.6% 22.4%  
Finance and other income 3,812 3,959 3.9% 11,317 14,542 28.5%
Finance expenses 898 842 -6.2% 2,693 2,891 7.4%
Depreciation 3,109 2,880 -7.4% 9,913 11,106 12.0%
Exchange difference 604 510 -15.6% 2,626 3,359 27.9%
Profit before tax 26,332 28,927 9.9% 78,596 101,005 28.5%
Tax 6,060 6,536 7.9% 16,912 22,600 33.6%
Profit for the period from continuing operations 20,272 22,391 10.5% 61,684 78,405 27.1%
Profit after tax for the period from discontinuing operations - -   5,012 -  
Profit for the period 20,272 22,391 10.5% 66,696 78,405 17.6%
Minority interest 125 126 0.8% 337 438 30.0%
Net profit available to equity shareholders 20,147 22,265 10.5% 66,359 77,967 17.5%
Net profit margin (%) 17.9% 19.1%   17.7% 18.0%  
No. of shares (m)         2466.3  
Diluted earnings per share (Rs)*         31.6  
P/E ratio (x)*         16.9  
* On a trailing 12-months basis

What has driven the performance in 4QFY14?
  • In 4QFY14 Wipro has delivered revenue growth of 3.4% QoQ. The growth in US dollar terms was at 2.5% QoQ.

  • The IT Services and IT product segments witnessed growth of 2.8% QoQ and 9.2% QoQ respectively.

  • In terms of service offerings, BPO was the main driver in the quarter while application development and maintenance was the only laggard.

  • In terms of industry verticals, the highest growth was seen in the core vertical of financial services while the only vertical that disappointed in this quarter was manufacturing and Hi-tech.

  • In terms of geographies, Wipro witnessed broad based growth in most of its primary geographies with India and the Middle East leading the way.

    Revenue breakup (In Rs m)
    Based on businesses 3QFY14 4QFY14 Change
    IT Services 103,274 106,193 2.8%
    IT products 10,155 11,090 9.2%
    Consumer care &Lighting  - -  
    Others (reconciling items) (122) (238)  
    IT services revenue breakup (Rs m) 3QFY14 4QFY14 Change
    Based on geography
    US 56,244 58,268 3.6%
    Europe 33,363 34,961 4.8%
    India and Middle East 9,581 10,255 7.0%
    Rest of the world 13,526 13,052 -3.5%
    Based on service offerings
    Application development and maintenance 22,430 22,142 -1.3%
    Global infrastructure services 28,066 29,134 3.8%
    Business application services 35,730 37,058 3.7%
    Product Engineering & Mobility 8,566 8,857 3.4%
    Analytics and Information Management 8,115 8,274 2.0%
    BPO 9,806 11,071 12.9%
    Based on verticals
    Global Media & Telecom 15,442 16,198 4.9%
    Finance Solutions 29,756 31,231 5.0%
    Manufacturing & Hi-tech 20,965 20,976 0.1%
    Healthcare, Life Sciences & Services 11,948 12,353 3.4%
    Retail, Cons. goods & Transportation 16,456 16,898 2.7%
    Energy and Utilities 18,147 18,879 4.0%

  • Wipro's operating margin improved by 1.2% in the quarter. This was largely due to lower direct costs sequentially as a percentage of sales as well as a 9.5% absolute reduction in sales and marketing costs QoQ.

  • The company's net margin improved to 19.1% in 4QFY14 from 17.9% seen in the last quarter. The sharp rise in net profit by 10.5% QoQ was mostly as a result of the control of operational expenses as well as a marginal fall in the tax rate from 23% in 3QFY14 to 22.6% in 4QFY14.
What to expect?
At the current price of Rs 533, the stock is trading at a multiple of 16.9 times its trailing 12 month earnings.

Wipro had a strong end to FY 14. In the last quarter 4QFY14, the topline was up 2.5% QoQ. This was bettered by the operating performance. The improvement in the operating performance was due to the various process automation systems that the company has put in place as well as simplifying its platform based services.

The company has seen a big pick up in terms of deal wins in the quarter. Even though the management does not provide specific deal pipeline numbers they have stated that both the pipeline as well as the deal win rates were among the highest in the last few years. Primarily due to this reason they expect FY15 to be better than FY14.

Wipro has seen an improvement in discretionary spending across verticals like retail, banking, utilities, pharma and media. While this is positive news, the management stated that discretionary spending in all other verticals was not picking up. Also the US is leading the way due to a faster adoption of new digital technologies. Growth from Europe on the other hand is a mixed bag.

The company has created a new business unit called 'Wipro Digital' specifically focused on digital technologies. This unit will directly deal with the Chief Marketing Officer (CMO) of large global corporations to work towards business transformation and sales growth and not just to reduce their costs with outsourcing.

The company has become extremely cost conscious and the management stated that they would not be hiring in large numbers as they have done before. Rather they would focus on process automation to keeps costs low and maintain employee productivity. This has certainly worked for the company this year and Wipro will continue with this strategy going forward as well.

While the long term prospects of Wipro are good, we believe that most of the upside is already factored in at the current valuations. Therefore we maintain our 'Sell' view on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested and that no single stock comprises more than 5% of your portfolio.

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