Tomorrow, Wipro will declare results for the first quarter of FY02. The reason why the results will be watched very closely is due to the fact that Wipro is one of the few software majors that has a strong technology focus. The other being HCL Technologies. Wipro derives a significant portion of its revenues from its R&D group, which is a part of Wipro technologies (57% of Wipro Ltd.’s revenues in FY01). Wipro Technologies is the Global IT services arm of Wipro Ltd. The R&D group contributed 54% to Wipro Technologies revenues in 4QFY01 (this translates to 31% of Wipro Ltd.’s revenues).
As the revenues that Wipro gets under the R&D group comes from the research and development expenditure of customers, and not IT expenditure, it is relatively immune from the slowdown. This was quite evident in 4QFY01 results. The R&D group had managed to show a sequential (QoQ) growth of 16% in 4QFY01. Wipro is looking exactly at this area (R&D) to beat the industry growth rates. It plans to aggressively push its (R&D) services and focus on high-end technologies like embedded software, and also high growth markets such as telecom, mobile communications and the Internet. Within the R&D group, all the three practices had shown a very strong growth (QoQ) in 4QFY01.
R&D group (Rs m)
Telecom and Internet working
Embedded systems and Internet access
Telecom and internet service provider practice
According to Wipro, the business from its telecom customers is not dropping. This is quite an achievement considering the fact that the other software majors have In fact shown de-growth from the telecom sector. In Europe, (according to the company), sales to telecom firms were showing positive growth.
The opportunities could be stemming from the race to introduce 3G (third-generation) services. Europe's leadership in the Mobile telephony market is under threat. Currently, of the 700 m cellular subscribers worldwide more than two-thirds use the GSM (global system for mobile communication) standard created in Europe. With a shift towards 3G, which requires a whole new set of standards, there is fierce competition to establish a standard. 3G services are due to be launched in Europe next year. With US and Japan very close at Europe’s heels, the race to be the first is getting fiercer day by day. Therein lies an opportunity for companies like Wipro, as spending towards these areas are quite unlikely to see a cut.
R&D group (Rs m)
Enterprise solutions group
The area of concern will be the enterprise solutions division for Wipro Technologies that contributes about 41% (4QFY01) revenues of Wipro Technologies. The segment had showed a marginal decline in revenues of about 2% in 4QFY01. Though according to Wipro, the enterprise solutions markets have picked up relative to the beginning of the year it is more than likely that the company will again show a negative growth from this area. Another reason for de-growth could be the company’s focus on the technology sector and a lower emphasis on area like application development and maintenance.
Wipro Limited (including technology and consumer product division) is expected to post a sequential drop in topline due to the cyclical nature of its Indian IT services and products division (hardware), which accounts for 27% of total revenues. The company’s growth for the previous quarter (4QFY01) was on the back of 56% jump in revenues from this division. Therefore, the topline is expected to dip by about 20% (QoQ) in 1QFY02.
The significant volume growth in 4QFY01 had caused the operating margins of the Indian IT Services and products division to jump from a traditional 7% to 13.5%. In 1QFY02, the division is expected to show the lower volume growth. Consequently, operating margins for this division and Wipro Limited is expected to head south. This could translate to a 24% drop in net profits for 1QFY02 (QOQ).
The numbers to look out for tomorrow from Wipro would be the growth in the R&D group, which is expected to be around 6.5%. Operating margins for the Global IT services division are expected to be 35%. The stock at Rs 1,347 is trading at a P/E multiple of 37 times FY02 projected earnings, which still makes it the most expensive of all software companies.
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