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Wipro: In line with peers
Jul 19, 2007

Performance summary
  • Topline declines 2% QoQ on an appreciating rupee.

  • Operating margins contract by 2.4% QoQ due to rupee appreciation. On the positive side net utilisation increases by 6.3% making the fall in operating margins the lowest among its peers till now.

  • Bottomline declines 15% QoQ basis largely due to higher taxes and interest burden.

  • Global IT services adds 39 new clients during the quarter. Bags US$ 130 m deal from a European utility company.

Consolidated financial snapshot
(Rs m) 4QFY07 1QFY08 Change
Sales 43,223 42,360 -2.0%
Expenditure 33,804 34,135 1.0%
Operating profit (EBDIT) 9,420 8,225 -12.7%
Operating profit margin (%) 21.8% 19.4%  
Other income 967 1,243 28.5%
Interest 40 131 227.5%
Depreciation 1,091 1,176 7.8%
Profit before tax 9,256 8,161 -11.8%
Tax 746 1,005 34.7%
Minority interest (2) (3)  
Share of earnings in associates 49 97 98.0%
Profit after tax/(loss) 8,561 7,256 -15.2%
Net profit margin (%) 19.8% 17.13%  
No. of shares (m) 1,459 1,458  
Diluted earnings per share (Rs)*   20.9  
P/E ratio (x)*   23.9  
* On a trailing 12-months 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 (74% of consolidated revenues). Within the global IT services and products business, the company derives revenues from R&D services (30% of global IT services revenues), enterprise business (61%) and BPO services (9%). The company provides BPO services through its subsidiary, Wipro BPO Services. Over the period FY02 to FY07, Wipro’s consolidated revenues and profits grew at compounded rates of 34% and 27% respectively.

What has driven performance in 1QFY08?
Global IT services lead the race: Wipro recorded a 5% QoQ growth in topline in dollar terms. However, in rupee terms, the topline declined by 2% QoQ (on account of the rupee’s appreciation against the US dollar). The 5% QoQ growth in topline in dollar terms is a blended ratio of 4.9% growth in IT services revenue and 6.7% growth in BPO revenues. The topline growth in IT services was driven by a 6.5% QoQ increase in volume (hours worked). However, the company reported a marginal decline of 0.2% QoQ in blended pricing. In terms of business verticals, where there has been marginal decline in growth in all major verticals, the telecom and media verticals recorded growth of 11% QoQ and 2% QoQ respectively. In terms of business practices, the growth has more or less been stable with marginal increase in testing and BPO revenues. In terms of geographies, the contribution from US, which was on a decline in the past four quarter, has increased marginally making the company’s receivables more susceptible to foreign exchange volatility.

On the client side there has been a major account revamp in the recent past, as the number of US$ 50 m clients have doubled to 10 when compared with 5 in 1QFY07. Wipro also added its first US$ 100 m client in this quarter when it bagged a US$ 130 m deal from a leading European utility company. This is five year contract comprising of application development and maintenance and infrastructure management services. In terms of head count, the company added a net of 4,319 employees but what is more worrying is the fact that the attrition rate on trailing 12 months basis for IT services crossed 20% as compared to 17% in 4QFY07.

Rupee appreciation dampens margins:Wipro recorded a 2.4% decline in operating margins during 1QFY08. This was mainly due to steep appreciation in rupee against the US dollar. Rupee appreciation impacted the operating margins by 3.4% but the company was able to mitigate it increasing utilisation. One thing worth noticing is that the decline in Wipro’s operating margins has been the lowest when compared with Infosys (3%) and TCS (2.6%), which is mainly due to a 6.3% QoQ increase in the net utilisation in IT services. Utilisation in case of BPO services showed a marginal decline. The EBIT margins of BPO business stood at 22.8% in 1QFY08 and going forward the company expects to maintain the margins of this business in the range of 20% to 22%.

Higher taxes dents bottomline: Wipro recorded a 15% QoQ decline in its bottomline, mainly due to higher taxes and interest and lower other income. The effective taxes at the PBT level increased from 8% in 4QFY07 to 12% in 1QFY08, which took its toll on the net profits. Secondly, the rise in other income has been lower when compared to its peers mainly because Wipro has changed its hedge accounting policy to make its accounts comparable with IFRS (International Financial Reporting Standards) and US GAAP. Henceforth, the forex gain will be taken to profit and loss account only when it is realised and not on a mark to market basis. Of the total 2.7% decline in PAT margins, this change in accounting policy wiped of 1.1%. So Wipro will make a higher other income and will improve the PAT margins going forward when the forward contracts are actually executed while its peers will not do it since they have already booked their gains in 1QFY08. The company has a forex hedge of US$ 400 m within a range of Rs 40.42 to Rs 45.72 per US dollar.

What to expect?
At the current price of Rs 500, the stock is trading at 12.7 times our estimated FY10 earnings. The real concern for Wipro going forward will be in pricing negotiation and attrition control, which has grown significantly in 1QFY08. The company has not been able to increase its billing rates over the past twelve months and in this quarter too the pricing have shown a decline. Secondly, the operating margins could contract further during the fiscal considering that Wipro will implement wage hikes to offshore employees in August 2007, which, as per the management, will impact margins by 1.4% to 1.5%. The hike to onsite employees will be given in 4QFY08. Barring this, the company has won some of the major deals in the recent past and is ramping up its SEZ activities, which we believe will boost margins in the long term, considering the tax benefits associated with it. We maintain our positive rating on the stock from a long-term perspective.

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