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Wipro: Maintains its margins - Views on News from Equitymaster
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Wipro: Maintains its margins
Jul 18, 2008

Performance summary
  • Topline grows 42.5% YoY in 1QFY09 aided by growth in IT service and product businesses.
  • Operating margins expand by 1.1% YoY on account of better operational utilization of resources.
  • At the net profit level, the company pegged 25.1% YoY growth.
  • IT Services adds 31 new clients in the first quarter of FY09.
  • Employee strength stood at 95,675 employees for IT services as of June 30, 2008, which included 74,838 employees in IT business unit and 20,837 employees in BPO business unit.


Financial performance (Consolidated): A snapshot
(Rs m) 1QFY08 1QFY09 Change
Net Sales 42,360 60,365 42.5%
Expenditure 34,135 48,009 40.6%
Operating profit (EBDIT) 8,225 12,356 50.2%
Operating profit margin (%) 19.4% 20.5%  
Other income 1,243 506 -59.3%
Interest 131 775 491.6%
Depreciation 1,176 1,578 34.2%
Profit before tax 8,161 10,509 28.8%
Tax 1,005 1,526 51.8%
Minority interest (3) 12 -500.0%
Equity in earnings of affiliates 97 107 10.3%
Profit after tax/(loss) 7,256 9,078 25.1%
Net profit margin (%) 17.1% 15.0%  
No. of shares (m)   1,461.0  
Diluted earnings per share (Rs)   23.7  
P/E ratio (x)   15.3  

What has driven performance in 1QFY09?
  • The growth in topline during 1QFY09 was aided by sales growth of IT service and product divisions, which grew by 39% and 44% YoY respectively. However, the fastest growth was recorded by the consumer care and lighting business (CC&L), which grew sales by 119% YoY. Growth in CC&L division can mainly be attributed to the inorganic growth. Wipro had earlier acquired a Singapore-based FMCG firm, Unza, in August 2007. Unza continues to create value by growing business in Malaysia, Middle East, Indochina and Indonesia.

    Segmental performance analysis
    (Rs m) 1QFY08 1QFY09 Change
    IT Services 31,597 44,045 39%
    IT products 5,175 7,463 44%
    Consumer care &Lighting 2,343 5,127 119%
    Others 2,738 3,286 20%
    Elimnations (63.00) (254.00) 303%
    Total 41,790 59,667 43%

  • Wipro grew its IT business in the US and European region by 37% YoY during the first quarter of the fiscal. Wipro’s forays in India and Middle East also witnessed decent growth, with the Indian business growing by 23% YoY. The management has indicated that it is seeing a strong traction in Middle East and Indian market. Wipro Arabia managed to win a large multi-million dollar turnkey IT solutions and infrastructure services project from a leading government owned technology institute based in the Middle East. In the Indian market the company won a 10-year total outsourcing contract with a large realty company and a comprehensive SAP implementation suite at a large public sector enterprise. Traction in these markets will help company to de-risk its over dependence on the US market and would help it grow its business going forward.

    Geographical performance
      1QFY08 1QFY09 Change
    India 10,185 12,558 23%
    US 19,153 26,189 37%
    Europe 10,545 14,473 37%
    Rest of the world 1,906 6,448 238%
      41,789 59,668 43%

  • On the manpower front, Wipro added a net of 13,110 employees in the last 12 months. IT service added 7,955 employees, BPO division added 1,773 employees and the Indian and Middle East IT services added 3,382 employees. The company plans to higher around 14,000 employees for FY09.

  • Wipro recorded a marginal 1.1% YoY expansion in its operating margins during 1QFY09. The margins were affected chiefly on account of volatility in the rupee against US dollar. However, Wipro managed to offset it with better utilisation of resources, higher volume and better pricing. The other factor that partially helped was depreciation of the rupee against the US dollar (rupee has depreciated 8% against the US dollar in the last six months).

  • Wipro recorded 25.1% YoY growth in net profits during 1QFY09. Had the tax outgo and interest expense not been higher, the company would have registered higher net income. The company had to incur higher interest expense mainly on account of taking loans on its books for funding the acquisitions of Infocrossing and Unza. The company’s interest expenses increased by almost 5 times.

What to expect?
At the current price of Rs 365, the stock is trading at a multiple of 12.2 times our estimated FY10 earnings. The management has indicated that although it is cautious about on the going economic crisis in the West, especially in the US, it is unlikely to be significantly affected by the crisis as only 25% of its IT service revenue comes from banking and financial service segment. The company projected growth in its differentiated service lines like Testing, TIS and BPO. We expect the company to register healthy growth on account of its good order book and strong pipeline of projects.

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