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Wipro: Extraordinary items take toll

Jul 19, 2002

Wipro has posted a 15% growth in topline for 1QFY03, compared to corresponding quarter last fiscal (FY02). However, the net profit figure has declined by 20%. This is due to an extra-ordinary write-off amounting to Rs 389 m consequent to the company discontinuing its ISP business. Excluding the write-off, net profits have declined by 5%. The rise in other income has been significant.

(Rs m) 1QFY02 1QFY03 Change
Sales 7,852 9,063 15.4%
Other Income 97 198 104.1%
Expenditure 5,617 6731 19.8%
Operating Profit (EBDIT) 2,235 2,332 4.3%
Operating Profit Margin (%) 28.5% 25.7%  
Interest (207) 8 -103.9%
Depreciation 311 321 3.2%
Profit before Tax 2,228 2,201 -1.2%
Tax 151 231 53.0%
Extra-ordinary income / (expense) - -305  
Profit after Tax/(Loss) 2,077 1,665 -19.8%
Net profit margin (%) 26.5% 18.4%  
Diluted number of shares 231.9 231.9  
Diluted Earnings per share* 35.8 28.7  

Revenues from Wipro Technologies, the company’s global IT services business, grew by 7% sequentially (QoQ). The contribution to the total revenues was 68%. The strong sequential growth in topline for Wipro Technologies comes inspite of a steep fall in billing rates. The company saw onsite billing rates fall by 5.6% QoQ. The fall in offshore billing rates was 4.5%. The decline in billing rates was offset by a sharp improvement in utilization that improved by 6% to 66%. This points to the fact that the company saw a swift ramp up in volumes. The operating margin at 31% was lower by 1% compared to 4QFY02 and by 5% compared to 1QFY02. The decline in billing rates that the company has seen throughout the year is now showing on the margins.

Global IT services division 1QFY02 1QFY03
R&D group 52% 41%
Enterprise solutions group 42% 59%
Support services 6% -
Total 100% 100%

The R&D services group of Wipro Technologies, that is focused on providing IT services related to technology, saw revenues decline by 11% YoY. The drop in revenues was 4% QoQ. The steep fall in revenues is likely due to the fact that a significant number of clients for the group are from telecom vertical, which is facing very tough times. This loss in business was offset by strong growth seen for the enterprise solutions group and the infrastructure business.

The company added 22 new clients and 919 employees during the quarter. The revenues from offshore projects decreased from 50% in 1QFY02 to 48% in 1QFY03. This could be due to a number of new projects starting, which generally takes place onsite.

Wipro intensified efforts to add pace to its topline growth through the inorganic route. It has decided to increase its stake in Spectramind e-services to 90% from the existing 15%. The IT services major will buy a 66% stake for a consideration of Rs 4 bn (US$ 83 m) cash.

In April 2002 Wipro had launched a new initiative, Wipro Healthcare and Life Science (WH&LS) to address the US$ 25 bn bio-informatics markets that is expected to grow swiftly at CAGR of 20% in over the next few years. No doubt the reality is much subdued, but the fact is there is a big opportunity.

To strengthen its presence in the segment, the company has now acquired a 100% stake in GE Medical Systems Information Technologies Pvt. Ltd (GEMS) for a consideration of US$ 5.7 m (Rs 279 m). The acquisition enables the WH&LS to offer IT solutions for hospital administration and management. Infact the acquired company has a Hospital Information System package known has HIRepS. The package is an enterprise resource planning (ERP) software custom made for managing hospitals. The client list for the product includes Apollo group, Fortis Healthcare, Manipal group and Wockhardt. The product has already been installed in over 20 hospitals. In the first 90 days of its operations WH&LS, has already acquired 4 global customers including one for clinical process outsourcing.

Wipro Infotech that accounted for 21% of the revenue saw a strong 20% growth in revenues YoY. The contribution of service to revenues was 26% for 1QFY03. The business saw revenues from infrastructure and software services grow by more than 30% (YoY) during the quarter. The number of new clients added was 9. The growth in networking business was a strong 104%, while enterprise and server strong business grew by 48%. These services give Wipro a competitive advantage. Wipro Infotech leveraging on its size an easily offer 24x7 IT outsourcing services, wherein corporates completely outsource their IT departments. Other Indian software majors like Infosys have also started offering these services.

At the current market price of Rs 1,264, the stock is trading at a P/E multiple of 44x its 1QFY03 annualised earnings. The downturn in the telecom vertical has taken a toll on the company’s numbers. However, on the brighter side, strong ramp up in the enterprise segment highlights the company’s agility. Wipro, which is one of the largest companies in IT services segment, is likely to be one of the key beneficiaries of the demand for offshore work gaining ground in the west. This is evident from the company’s guidance of 5% sequential growth in global IT services revenues for 2QFY03. Going forward, due to uncertain business environment the company’s stock price may be in for a bout of volatility.

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