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Wipro: Still lags behind the industry
Jul 20, 2011

Wipro has announced the first quarter results of financial year 2011-2012 (1QFY12). The company has reported a 2.7% QoQ growth in sales and a 2.9% QoQ decline in net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales grow by 2.7% QoQ during the quarter. This was driven by 1.8% QoQ growth in volumes.
  • Operating margins decline by 0.8% QoQ due to higher employee costs as well as higher selling & marketing expenses (both as a percentage of sales).
  • Net profits decline by 2.9% QoQ. This was on account of lower operating margins as well as higher interest charges. Net profits were also adversely impacted by higher tax rate during the quarter.
  • Employee strength of the IT services business stood at 126,490 at the end of June 2011. IT services added 4,105 (net) employees during 1QFY12. Attrition declined marginally to 22.6% as compared to 22.7% for the previous quarter (March 2011).
  • IT services segment adds 49 new clients during the quarter, thereby taking the total count of active clients to 937.
  • Gross utilization rate was up to 69.7% during the quarter as compared to 68.9% seen in the previous quarter (4QFY11).


(Rs m) 4QFY11 1QFY12 Change
Revenues 82,715 84,929 2.7%
Expenditure 65,956 68,350 3.6%
Operating profit (EBDIT) 16,759 16,579 -1.1%
Operating profit margin (%) 20.3% 19.5%  
Other income 928 650 -30.0%
Interest expense/ (income) (563) (782) 38.9%
Depreciation 2,281 2,338 2.5%
Equity in earnings of affiliates 139 110 -20.9%
Exchange difference 309 711  
Exceptional Items      
Profit before tax 16,417 16,494 0.5%
Tax 2,604 3,096 18.9%
Minority interest (59) (49)  
Net profit available to equity shareholders 13,754 13,349 -2.9%
Net profit margin (%) 16.6% 15.7%  
No. of shares (m) 2,454.9 2,456.1  
Diluted earnings per share (Rs)*   21.8  
P/E ratio (x)*   18.3  
* On a trailing 12-months basis

What has driven performance in 1QFY12?
  • Wipro's sales grew by 2.7% QoQ during 1QFY12. This was driven by growth in all the business segments. The IT services business (75% of total sales) and the IT products business (12% of total sales) registered a growth of 1.8% QoQ and 10.5% QoQ. The consumer care & lighting business (9% of total sales) witnessed a growth of a growth of 4.2% QoQ during the quarter.

  • With regards to segment wise performance, growth in Wipro's IT services business was driven by ‘Analytics and Information Management' and ‘Business application services'. The ‘Analytics and Information Management' and ‘Business application services' segments witnessed a growth of 8.6% QoQ and 4.2% QoQ during the period. The ‘Technology infrastructure services' and ‘Product Engineering & Mobility' segments witnessed an increase of 2.3% QoQ and 3.1% QoQ during the quarter. However, the key segment of ‘Application development and maintenance', which constitutes 24% of IT services' total sales, witnessed a decline of 1.5% QoQ during the quarter. The BPO segment also witnessed a lackluster performance and declined by 3.4% QoQ during the quarter.

  • The growth in sales was driven by three verticals ‘Energy & Utilities', ‘Manufacturing & Hitech' and ‘Finance Solutions' which grew by 15.8% QoQ, 1.8% QoQ and 1.8% QoQ respectively during the quarter. However other three verticals ‘Retail & Transportation', ‘Healthcare, Life Sciences & Services' and ‘Global Media & Telecom verticals' witnessed a decline of 2.7% QoQ, 1.1% QoQ and 0.5% QoQ during the quarter.

    IT services revenue breakup (In Rs m)
    IT services revenue breakup (In Rs m) 4QFY11 1QFY12 Change
    Based on service offerings
    Application development and maintenance 15,534 15,307 -1.5%
    Technology infrastructure services 13,584 13,898 2.3%
    Business application services 18,679 19,470 4.2%
    Product Engineering & Mobility 5,157 5,316 3.1%
    Analytics and Information Management 3,773 4,099 8.6%
    BPO 6,163 5,956 -3.4%
    Based on verticals
    Global Media & Telecom 10,817 10,760 -0.5%
    Finance Solutions 16,792 17,100 1.8%
    Manufacturing & Hitech 12,390 12,617 1.8%
    Healthcare, Life Sciences & Services 6,604 6,533 -1.1%
    Retail & Transportation 9,874 9,607 -2.7%
    Energy and Utilities 6,415 7,429 15.8%

  • In terms of geographies, the revival in the business from Europe continued during the quarter. Sales from the region grew by 4.9% QoQ during the period. Revenues from ‘Rest of the world' and ‘India and Middle East' saw a growth of 13.6% QoQ and 1.5% QoQ respectively. Revenues from Wipro's major market i.e., the US (54% of sales) market witnessed a growth of 1.0% QoQ in sales during the quarter. However, sales from Japan witnessed a massive decline of 25% QoQ during the quarter.

    Revenue breakup (In Rs m)
    Based on geography(Rs m)
    (Rs m) 4QFY11 1QFY12 Change
    US 44,583 45,012 1.0%
    Europe 23,160 24,290 4.9%
    Japan 1,241 934 -24.7%
    India and Middle East 7,527 7,644 1.5%
    Rest of the world 6,204 7,049 13.6%
    Based on businesses
    IT Services 62,891 64,046 1.8%
    IT products 9,105 10,058 10.5%
    Consumer care &Lighting 7,244 7,545 4.2%
    Others 3,519 3,959 12.5%

  • Wipro's operating margins declined by 0.8% QoQ due to higher employee cost as well as higher selling & marketing expenses (both as a percentage of sales).

  • Wipro's net profits declined by 2.9% QoQ. This was on account of lower operating margins as well as higher interest charges. The tax rates were also higher at 18.8% as compared to 15.9% seen during the previous quarter (4QFY11) As a result, net margin declined by around 1% QoQ during the quarter.

What to expect?
At the current price of Rs 399, the stock is trading at a multiple of 12.5 times our estimated FY14 earnings.

At the beginning of the year, the management had carried out several organization changes to make Wipro simpler, agile and more customer centric. As per the management, the benefits of these have already started to flow in and would be more visible in the quarters to come. The management expects demand environment to remain volatile in the near term. However, they stated that this has not impacted the decision making of clients towards IT spending.

The company has registered a decline in both onsite as well as the offsite realizations during the quarter. Going forward, the management expects the pricing to remain flat with an upward bias. They stated that business like analytics, core services, Enterprise Resource Planning (ERP) would witness some price uptick. At the same time, some business segments may witness decline in the pricing.

With regards to margins, the management expects it to improve from the current levels through better employee mix, non-linearity etc. They expect tax rate to be around 20% for the financial year FY12.

The attrition remained at high level of 22.6% during the quarter. The management stated that many people left the organization during the quarter due to restructuring as many positions became redundant. Therefore, the management expects attrition to go down in the coming quarter.

We would be revising our future estimates for the company and update our analysis by the end of next week.

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