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Wipro : Good bottomline, disappointing topline

Jul 20, 2001

Wipro's first quarter results have come as a slight disappointment. The revenues for 1QFY02 have dropped by 15% sequentially. However, the profits have dipped by a marginal 4% which is way above expectations (excl extra-ordinary income of Rs 16 m in 4QFY01). On a YoY basis the company's revenues have grown by 27% and the net profits have jumped by 93%.

(Rs m) 4QFY01 1QFY02 Change
Sales 9,212 7,852 -14.8%
Other Income 176 97 -44.9%
Expenditure 6,627 5,617 -15.2%
Operating Profit (EBDIT) 2,585 2,235 -13.5%
Operating Profit Margin (%) 28.1% 28.5%  
Interest (107) (207)  
Depreciation 314 311 -1.0%
Profit before Tax 2,554 2,228 -12.8%
Tax 395 151 -61.8%
Extra-ordinary item 16 - -
Profit after Tax/(Loss) 2,175 2,077 -4.5%
Net profit margin (%) 23.6% 26.5%  
Diluted number of shares 231.9 231.9  
Diluted Earnings per share* 37.5 35.8  
P/E (at current price)   38.2  
*(annualised)      

Wipro has managed to improve its operating margins by 40 basis points. This is due to the fact that the contribution of the Global IT services business (Wipro Technologies) has gone up significantly from 55% in 4QFY01 to 65% in 1QFY02.

However, the disappointment comes from the revenue growth of Wipro Technologies, which was just 0.8% sequentially, against an expectation of 6.5%.

While the contribution of the global IT services was 65%, the contribution of Indian IT services and products was down to 20% (30% in 4QFY01). The contribution of consumer care and lighting division was 10% (8% in 4QFY01).

The highlight of the performance is the fact that Wipro has managed to improve its operating margins for Global IT services division from 35% in 4QFY01 to 36% in 1QFY02. Considering the tough environment this is quite an achievement. Wipro has infact managed to increase billing rates by 3.4% for offshore projects and 2.6% for onsite projects. While other Indian software companies have reduced billing rates, Wipro has managed to hold its own. And the fact that it has managed to secure billing rate hikes show the strength of the company's brands.

As per expectations the operating margins of the Indian IT services and products division came down from 13.5% in the 4QFY01 to 5% in 1QFY02. This is due to the fact the nature of the business of this division is predominantly hardware related, which is cyclical. In the previous quarter the business had show significant growth due to high volumes but as this time of the year the volumes are not high the margins have declined.

However, the Global IT division grew below expectations. This could be due to the fact that Wipro has not given into pricing pressure and therefore, has concentrated on quality projects. But the concern is how long will the company be able to sustain its billing rates.

Within the Global IT services division, the elite R&D group has infact shown a de-growth of 3%. And contrary to our expectations the enterprise solutions group has shown a 3% growth. However, the pleasant surprise is the growth of 21% in support services.

Global IT services division (Rs m) 4QFY01 1QFY02 Change
R&D group 2,792 2,709 -3.0%
Enterprise solutions group 2,120 2,188 3.2%
Support services 259 313 20.7%
Total 5,171 5,210 0.8%

During the quarter Wipro added 25 new clients. However, the company has decreased the number of employees by 139 (the company added 158 employees and there were 297 separations).

The company's revenues from the US declined to 60% in 1QFY02 compared to 61% in 4QFY00 and from Japan it declined to 6% from 7%. The revenues from Europe on the other hand grew to 33% compared to 31% in 4QFY01.

On the face of it the revenue growth looks disappointing. But there is definitely merit in the management's decision to forgo quantity, in favour of quality. As strong brands always stand for quality.

At the current market price of Rs 1,369 the stock is trading at a P/E multiple of 38 times 1QFY02 annualised earnings. Due to the concerns regarding future growth, the stock is not likely to see a sharp rise in valuations and may remain range bound.


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