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Wipro – Heady valuations

Jul 10, 2000

Wipro is a professionally managed and third largest software services company. It is a multi product company with a major presence in software and hardware. The company also has a marginal presence in consumer care and lighting, vanaspati oil and related activities. Wipro’s diversification into IT way back in 1982, has resulted in marked improvement in its market capitalisation. Over the years the company has grown to become a name to reckon with in the software industry and a leading player in the hardware business. It was the first software services company in the world to receive the prestigious SEI CMM Level 5 certification.

In the current year, Wipro has reported 46% growth in its net profits to Rs 2.5 bn fuelled by 65% growth in its software division. The company is also planning to have an ADR issue of Rs 10 bn, which will enable it to acquire more companies abroad and thus grow faster.

However the major concern for the company is that its non-software businesses might dilute its earnings quality (a part of the company’s profits come from non-software business such as computer hardware, edible oils and lighting). As against this the industry leaders Infosys and Satyam derive all their earnings from their software businesses. The company’s management has no plans to hive off these businesses into separate companies. This diversification might affect its future profitability since non-software businesses earn comparatively lower margins.

The company has always enjoyed higher valuation in the market and it has always been a matter of great interest, as to how Wipro's valuations are so high. Currently, Wipro is available at P/E of 281 times its FY00 earnings. Considering its 52 week High/Low, the script has moved in the P/E range of 904/136 times its FY00 earnings. This exceptionally high valuation ratio was due to lack of supply of stock in the market, which propelled the valuation of the stock (management holding is 75%). Also the stock has a high weightage in a number of benchmark indices for example MSCI. It seems that the stock is adequately or rather overvalued at the current price and there is limited upside potential. The comparative table represented below is the evident of Wipro’s premium valuation.

Particulars Wipro Infosys Satyam Hughes Software
Market Price (Rs) 3,055 8,500 3,190 3,039
P/E 282 197 114 134
Market Cap. 699,595 562,700 165,880 50,448

Key Ratios
Particulars Wipro Infosys Satyam Hughes Software
Sales growth 28.0% 73.0% 79.0% 57.0%
Net profit growth 77.0% 117.0% 79.0% 157.0%
Operating profit margins 19.0% 39.0% 37.0% 38.0%
Net profit margins 13.0% 32.0% 19.0% 28.0%

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Sep 25, 2020 03:36 PM