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Conference call excerpts: Wipro - Views on News from Equitymaster
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Conference call excerpts: Wipro
May 16, 2005

We had a conference call with the management of Wipro post the FY05 results. The objective was to understand the growth prospects of the software sector over the next three years and where Wipro is placed with respect to its peers.

Company background
Wipro is the third largest software services exporter from the country and also has interests in the consumer care and lighting businesses. The largest contribution to its revenues comes from the global IT services and products division (74% of consolidated FY05 revenues and 88% of consolidated EBIT). Within the global IT services and products business, the company derives revenues from R&D services (33% in FY05), enterprise business (56%) and BPO services (11%). The company provides BPO services through its subsidiary, Spectramind, which it has renamed as Wipro BPO Services and plans to merge it with Wipro in FY06.

Excerpts of the call
View on the industry:  The company believes that IT spending will slow down to a slight extent during FY06 (only that the pace is likely to be slower). However, the company expects the offshore momentum to continue, as companies continue to outsource work to high-skills-low-cost destinations like India in order to cut costs and remain competitive.

No structural shift in the industry:  After Infosys and TCS announced their annual results for FY05, there has been concern among the investing community that there is a structural shift occurring in the industry, in terms of clients taking longer to make decisions on outsourcing. This could increase the volatility in earnings. However, the company has put to rest all such concerns by stating that it does not see any such shift and that the stability in earnings in not a concern as far as it is concerned.

Though the stock market is more focussed on quarterly results, in our view, considering the long-term outsourcing prospects, the direction is likely to be secular and we are enthused by the same.

Internal reorganisation of the company:  Wipro has renamed its BPO subsidiary as Wipro BPO Services and merged it with itself. The main rationale behind this move, according to the company, is, first of all, convenience at the operating level. Wipro can leverage its facilities and infrastructure to provide a complete solution to its clients. In addition, the domain expertise built up by Wipro over the years can be shared with the BPO division in order to enable it to deliver better quality solutions to its customers. An added advantage is the unique time zone advantage that India enjoys, which will help Wipro to deliver IT services during the day and BPO services during the night. Thus, it can provide round-the-clock services to its clients, a virtual competitive advantage enjoyed by Indian IT services firms and more critically, one that cannot be eroded.

View on billing rates and profitability:  Going forward, the company expects its billing rates to remain largely stable with a slight upward bias in both onsite and offshore rates. It has said that it is having a difficult time getting higher rates from existing clients, but at the same time, it is not giving any discounts either. The main increase in rates has been coming from new clients. Volumes are expected to be robust and will be the main driver for revenue growth in the IT services business. Regarding margins, the company expects it to remain stable, apart from any adverse currency movements.

SG&A expenses:  The company expects its SG&A expenses to rise marginally as a percentage of revenues, going forward. The main reason for this has been attributed to the fact that during the year, it has added a lot of people on the business development side. Also, a few quarters earlier, owing to acquisition-related expenses and retention bonuses, SG&A as a percentage of revenues went up. Over the past few quarters, this has been coming down, due to the phasing out of these expenses. Therefore, owing to higher employee costs, these are expected to increase slightly.

View on the telecom vertical:  Telecom is a key vertical for Wipro and the company derives a significant proportion of its revenues (over 40% of revenues). Going forward, the company expects R&D spending to slow down slightly. In the telecom vertical, the company expects outsourcing of maintenance of telecom gear to grow at a faster rate. This provides an element of stability to revenues, as they are assured over a period of six to ten years. Currently, these contribute to around 35% of telecom revenues for Wipro.

The HR angle:  The attrition rate at Wipro has increased from 10% during FY03 to 15% during FY05. The major reason for this is the attrition in the BPO division. In the IT services business, it is 12%. Going forward, the company has said that it is taking steps in order to reduce the attrition rates in its BPO business. As far as the current year’s employee intake is concerned, Wipro traditionally does not give any numbers, but it has so far made around 7,000 offers at the campus level. An increased proportion of employees at entry-level positions is expected to enable Wipro to reduce its costs per employee.

Future growth drivers:  Wipro expects its future growth to be driven by its ability to focus on verticals where it sees strong growth, going forward. It has been putting a strong emphasis on pushing its differentiated services to clients. These are services where the company has a differentiated edge over its competitors, like BPO, infrastructure management services and testing services. It has been focussing on these services of late and these have grown at a faster pace than overall revenues. The change in the business mix is also expected to have some impact on billing rates.

Our view
At the current market price of Rs 636, Wipro’s stock is trading at a price to earnings multiple of around 18.6 times our estimated FY07 earnings. We have a HOLD view on the stock. During the period FY05 and FY08, we expect revenues and profits of the company to grow at CAGR of 28.2% and 22.6% respectively. Given the company’s visionary management, a strong second-line management, ability to focus on fast-growing verticals and scalability, it is expected to be one of the major beneficiaries of the outsourcing story, which is expected to continue to play out over the next few years. As a result, we believe that future prospects are bright.

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