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Wipro: Performance disappoints - Views on News from Equitymaster
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  • Jul 18, 2003

    Wipro: Performance disappoints

    Wipro has announced its consolidated 1QFY04 results and has reported a revenue growth of 31% on a YoY basis. Profits on the other hand have improved by a lower 8% in the same period. Pressure on operating margins (210 basis points decline) has been the main reason for the lackluster bottomline performance of the company. Higher depreciation has further added to the woes.

    Rs m 1QFY03 1QFY04 Change
    Sales 9,048 11,867 31.2%
    Other Income 405 274 -32.2%
    Expenditure 7,025 9,462 34.7%
    Operating Profit (EBDIT) 2,023 2,404 18.9%
    Operating Profit Margin (%) 22.4% 20.3%  
    Interest 8 6 -31.1%
    Depreciation 222 323 45.2%
    Profit before Tax 2,197 2,350 7.0%
    Extraordinary items 0 0  
    Tax 242 232 -4.2%
    Profit after Tax/(Loss) 1,955 2,118 8.4%
    Net profit margin (%) 21.6% 17.9%  
    No. of Shares 232.5 232.5  
    Diluted Earnings per share* (Rs) 33.6 36.4  
    P/E Ratio (x)   24  
    (* annualised)      

    The company, in its move towards becoming India’s top software company by 2004, has increased its revenue contribution from the Global IT Services business. Revenues from this business have risen by 46% on a YoY basis. However, this also includes the revenues from Spectramind, Wipro’s ITES venture and Nervewire (Rs 119 m), the acquisition of which was completed in May 2003. Revenues from India & Asia-Pacific IT Services and Products (Wipro Infotech) have shown a YoY decline of 16%.

    Wipro Technologies (Global IT Services and ITES)
    This segment has contributed to 77% of total revenues of Wipro (68% in 1QFY03). The 46% rise in revenues from this segment is mainly due to growth in volumes. However, pricing pressure continues and PBIT margins for this segment have declined substantially from 31% in 1QFY03 to 21% this quarter. Even on a sequential basis, the decline has been a large 390 basis points. Also, the operating margins continue to decline for the IT services business. Operating margins were 22% this quarter, a sequential decline of 2% and YoY decline of a substantial 9%.

    While billing rate decline and appreciating rupee have put pressure on the global IT services margins, increase in employee and selling, general and administrative (SGA) expenses (increased from 16% of revenues in 1QFY03 to 18% this quarter) have added to the pressure. The company also added 2,251 employees to its global IT services business, to take the total number to 21,080 as on June 30, 2003. Of these 14,618 employees are in the IT services business while 6,462 employees are in the ITES segment. This, combined with early year salary hikes, has taken personnel expenses as a percent of revenue from 15% in 1QFY03 to 19% in 1QFY04. This has put additional pressure on the margins.

    Growth for the quarter was mainly contributed by a 31% growth in the Enterprise Solutions segment (8% sequential growth). However, the R&D segment, consisting of services offered in embedded systems, telecom and inter-networking, grew by a marginal 2% YoY. This marginal growth in R&D services is mainly on account of the fact that clients in the telecom space are one of the worst hit due to the economic slowdown that has engulfed global economies. Due to this they are spending less on new R&D services.

    Pressure on R&D…
      1QFY03 1QFY04 Change
    R&D Services (Rs m) 3,710 3,797 2.3%
    % of revenues 41.0% 32.0%  
    Enterprise Solutions (Rs m) 5,338 7,001 31.2%
    % of revenues 59.0% 59.0%  
    ITES (Rs m) 0 1,068  
    % of revenues 0.0% 9.0%  
    Total revenues (Rs m) 9,048 11,867 31.2%

    For 1QFY04, the results of global IT services division have been consolidated with Wipro’s IT enabled services business (Spectramind). This (ITES) segment has posted a 19% sequential growth for 1QFY04.

    The company added 38 new clients in 1QFY04 to take the total number of clients to 143. The addition in this quarter is higher than 28 clients that were added in the previous quarter. Of these new additions, 15 were added for R&D services, 13 for Enterprise solutions, 2 for ITES and 8 for Nervewire.

    Wipro Infotech (India & Asia Pacific IT Services & Products)
    This segment accounted for 13% of Wipro’s revenues for the quarter. This contribution is significantly lower than the 20% that it made in 4QFY03. Also, this segment has shown a 16% decline in revenues YoY. Services business contributed 37% of Wipro Infotech’s revenues and showed a growth of 25% YoY. Notably, the PBIT margins have improved from 5% in 1QFY03 to 6% this quarter.

    At the current market price of Rs 880, the stocks is trading at a P/E multiple of 24x its 1QFY04 annualized earnings. This valuation seems stretched relative to those of other Indian software majors. For 2QFY04, the management has given a guidance of a 6% sequential rise in revenues of global IT services business (including ITES) to $210 m. Overall, for 1QFY04, the results for Wipro Ltd have not been encouraging. While the topline growth has been good, this is mainly a result of inclusion of Spectramind revenues. Excluding this, the topline growth has been a lower 19%, relative to the growth that its peer Infosys has shown. The company is also witnessing pressure in its India & Asia-Pacific business. Further, margin pressure is showing no signs of abatement. Investors, thus, do not seem too impressed by the results, and the stock is taking a beating on the bourses.



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