While stocks of the Indian software majors have had their share of high levels of volatility that has characterised their movements in the past years, there is one company, Wipro, which seems to have witnessed excessive volatility, more than its peers (see graph below). Well, apart from factors like the technology sector slowdown that resulted in a meltdown in technology spending worldwide, others like Wipro's service offerings and low liquidity in the stock added to the woes of shareholders.
Note: Returns are calculated on Rs 100 invested in June 1999
Without delving much into the past and detailing about what contributed to Wipro's slackened performance, the fact that the company has restructured its businesses and has extended its portfolio across a wide band of service offerings augurs well for its future growth. This is because the line of service offerings that Wipro has extended its presence into is also where the software industry expects higher growth to come from. For instance, a Mckinsey-NASSCOM study has projected the infrastructure outsourcing and package implementation businesses to grow at CAGR of 80% and 58% respectively over the next 4 years. And Wipro seems to be in line with this projected growth in markets for these services. While its infrastructure outsourcing business has grown by 34% YoY in FY04, the package implementation segment grew at almost double the rate (71%).
A major achievement of this restructuring exercise that Wipro is undergoing is the reduction in revenue contribution from its R&D services where the company provides technology development services mainly to the global telecom sector. This segment now contributes to around 32% of Wipro's IT services revenues, lower from over 50% in FY02. Technology R&D outsourcing has been a volatile story for all players engaged in providing these services. This is because, in the past couple of years of the slowdown, this was the first and the worst to get hit from the drop in global technology spending.
At the current price of Rs 1,471, Wipro trades at a P/E multiple of 33x FY04 earnings and 23x our expected FY06 earnings. While the stock will continue to trade at a premium to its peers due to low floating stock, the upside is likely to come from the fact that Wipro is in the process of establishing requisite systems in place to meet higher demand for its services going forward. The company has been aggressive on the inorganic growth front, and when these acquisitions begin to bear fruit, they will indeed be a major factor in the company's higher growth going forward.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407