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Wipro: IT services save the day!
Jul 19, 2006

Performance summary
Wipro has announced its consolidated financial results for the first quarter ended June 2006. For 1QFY07, the company has reported a marginal growth in its topline on a sequential basis. This is due mainly to the seasonal nature of the India & Asia-Pacific IT services business, which declined significantly QoQ. However, the global IT services business saw decent sequential growth during the quarter. Cost savings have enabled a decent margin expansion during the quarter. However, lower other income and a higher effective tax rate have led to a flat growth in the bottomline.

Financial performance (Consolidated): A snapshot
(Rs m) 4QFY06 1QFY07 Change
Sales 30,719 31,456 2.4%
Expenditure 23,582 23,857 1.2%
Operating profit (EBDIT) 7,137 7,599 6.5%
Operating profit margin (%) 23.2% 24.2%  
Other income 822 477 -41.9%
Interest 7 2 -65.5%
Depreciation 845 895 5.9%
Profit before tax 7,107 7,179 1.0%
Tax 983 1,041 5.8%
Minority interest - -  
Equity in earnings of affiliates 55 65  
Profit after tax/(loss) 6,179 6,204 0.4%
Net profit margin (%) 20.1% 19.7%  
No. of shares (m) 1,439.2 1,441.2  
Diluted earnings per share (Rs)*   15.7  
P/E ratio (x)*   29.3  
*On a trailing 12-month basis.

About the company
Wipro is India’s third largest software services exporter and also has interests in the hardware and consumer care and lighting businesses. However, the largest contribution to its revenues comes from the global IT services and products division (78% of consolidated revenues). Within the global IT services and products business, the company derives revenues from R&D services (33% of global IT services revenues), enterprise business (58%) and BPO services (8%). The company provides BPO services through its subsidiary, Wipro BPO Services. Over the period FY01 to FY06, Wipro’s consolidated revenues and profits have growth at compounded rates of 28% and 25% respectively.

What has driven performance in 1QFY07?
Global IT services enthuse: During 1QFY07, Wipro’s consolidated topline saw a marginal 2.4% QoQ growth. However, the global IT services business grew at 5.8% QoQ. This was led by an equal growth in the IT services business, a flat growth in the BPO business and a strong 27.5% QoQ growth through acquisitions. During the quarter, Wipro acquired 3 companies – Enabler Informatica, a Europe-based retail solutions provider, Saraware Oy, a Finland-based engineering and design services provider, and Quantech Global Services, a mechanical design services firm based in India and the US. Revenues from Enabler have been included in the consolidated results effective June 30, 2006, and amounted to Rs 149 m (US$ 3.2 m) during the quarter, while PBIT amounted to Rs 27 m. Saraware Oy has also been consolidated during the quarter. Wipro has a focussed acquisition strategy, called ‘String of Pearls’, where the company’s main objective is to fill in gaps in its service offerings and get a wider geographical revenue base, so that it can offer a complete end-to-end integrated offering to potential clients.

In the global IT services business, the company saw onsite volumes grow at 6.1% QoQ, while offshore volumes saw a slower 3.0% QoQ growth. Wipro also witnessed a 0.8% QoQ increase in onsite billing rates, while offshore billing rates grew 0.5% sequentially. The balance growth of around 0.5% to 0.6% QoQ can be attributed to a higher realised rupee rate for the quarter.

As regards major service lines, Wipro continues to witness strong traction in its newer service lines that it has introduced over the past 5 years. Technology infrastructure services grew at an impressive 19.4% QoQ, testing services grew at 13.2% QoQ, while package implementation saw a 6.8% QoQ growth. On the other hand, the ADM business saw a 4.4% QoQ growth. The contribution from this service now stands at 59.6%, and has been reducing with each quarter. The BPO business, on the other hand, saw a 2.4% QoQ decline in revenues. This business continues to be in a restructuring mode.

Wipro added as many as 62 new clients during the quarter, including 24 in the Technology business, 36 in the Enterprise business and 2 in the BPO business. The total number of active clients now stands at 565 in IT services (494 at the end of FY06) and 31 in BPO (33 at the end of FY06). The company added a net of 2,841 people in IT services in 1QFY07, taking the total number of employees to 40,496 in this business. On the BPO side, the company actually reduced its headcount by 148, taking the total base to 15,939. Thus, the total headcount in the company’s IT and BPO business now stands at 56,435. It should be noted that the attrition rate was at 17% during the quarter in the IT services business, while the quarterly attrition was at 27% in the BPO business. Undoubtedly, this is a factor of major concern for Wipro, and the company will need to take steps to curb this if it is to be able to effectively compete against its Indian and MNC competitors.

Segmental break-up: Global IT services continue to enthuse
  4QFY06 1QFY07 Change
  Rs m Rs m %
Global IT services 23,171 24,505 5.8%
IT Services 20,637 21,842 5.8%
Acquisitions 443 565 27.5%
BPO Services 2,091 2,098 0.3%
India & AsiaPac 5,695 4,564 -19.9%
CC&L 1,658 1,768 6.6%
Others 876 804 -8.2%
Eliminations (268) (216)  
Total 31,132 31,425 0.9%

The other segments of Wipro also showed strong year-on-year growth. While the India & AsiaPac business (Wipro Infotech) grew at 35% YoY, Wipro Consumer Care & Lighting (CC&L) grew at a strong 30% YoY. Thus, the company continues to witness good growth in its major businesses, capitalising on 2 major themes – ‘outsourcing’ and ‘domestic consumption’.

Lower costs enhance margins: In 1QFY07, Wipro saw a 924 basis points expansion in its operating margins. This was due to savings on the cost of revenues side. It should be noted that employee costs as a percentage of revenues increased to 42.5% this quarter (39.8% in 4QFY06). Selling and marketing (S&M) expenses increased to 6.6% of revenues, as compared to 6.1% in 4QFY06. General and administrative (G&A) expenses, on the other hand, remained flat, at 4.6% of revenues.

As regards PBIT margins for all the businesses, global IT services’ PBIT margins fell by 50 basis points) to 24.6% (25.15 in 4QFY06). This was primarily due to acquisitions, which saw an operating loss this quarter. The IT services business saw margins fall by 174 basis points, while the BPO business witnessed a strong 266 basis points margin expansion. Wipro Infotech, on the other hand, saw a 220 basis points margin decline, while Wipro CC&L saw a 158 basis points margin expansion.

Lower other income and higher taxes subdue the bottomline: Despite the margin expansion, lower other income due to forex losses and a higher effective tax rate led to the bottomline clocking a marginal 0.4% QoQ growth. There were forex losses to the tune of Rs 56.4 m this quarter, as compared to profits of Rs 377.8 m in 4QFY06.

Performance in the recent past…
  2QFY06 3QFY06 4QFY06 1QFY07
Sales growth (%, QoQ) 9.8 10.9 11.1 2.4
Profits growth (%, QoQ) 11.7 13.7 13.7 0.4

What to expect?
At the current price of Rs 460, the stock is trading at a price to earnings multiple of 17.8 times our estimated FY08 earnings. During the quarter under review, the company exceeded its guidance for the global IT services business, growing to US$ 539 m (including BPO) as compared to the guidance of US$ 533 m. Wipro’s management expects consolidated revenues from the global IT services and BPO divisions to grow sequentially by around 7.0% in 2QFY07 to US$ 577 m. This signifies increasing expectations of stronger traction going forward. Of this, around US$ 10 m to US$ 11 m is expected to come from acquisitions.

The prospects for the global IT services business continue to remain strong, with offshoring increasingly becoming a key part of the IT strategy of global corporations. Greater traction in Europe is also being witnessed, which is a way of de-risking revenues away from the US market. R&D services, a major service line for Wipro, continues to witness strong growth. Being a top-tier software company, with size, scalability, management quality and execution strengths, we expect the company to continue to outperform the industry. Thus, we remain positive on Wipro from a longer-term perspective, and have a ‘BUY’ rating on the stock from current levels.

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