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Wipro: Muted performance in IT services - Views on News from Equitymaster
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Wipro: Muted performance in IT services
Jul 22, 2009

Performance summary
  • Sales decline marginally by 3% QoQ during 1QFY10, primarily on account of slowdown in the IT services business which contributed 77% to company’s revenue and recorded a decline of 2% QoQ. On a YoY basis, topline has grown by 5%.
  • Operating margins expand by 0.5% on account of cost containment measures.
  • Net profits manage a growth of 0.5% QoQ, aided by improvement in operating margins, and decreased interest and depreciation charges.
  • IT services business adds 26 new clients during the quarter.
  • Employee strength of the IT services business stood at 98,521 at the end of 1QFY10.


Consolidated financial performance: A snapshot
(Rs m) 4QFY09 1QFY10 Change
Net Sales 64,821 62,891 -3.0%
Expenditure 51,330 49,498 -3.6%
Operating profit (EBDIT) 13,491 13,393 -0.7%
Operating profit margin (%) 20.8% 21.3%  
Other income 1,011 994 -1.7%
Interest 848 606 -28.5%
Depreciation 1,872 1,798 -4.0%
Profit before tax 11,782 11,983 1.7%
Tax 1,667 1,864 11.8%
Minority interest (50) (49) -2.0%
Equity in earnings of affiliates 35 85 142.9%
Profit after tax/(loss) 10,100 10,155 0.5%
Net profit margin (%) 15.6% 16.1%  
No. of shares (m) 1,461.9 1,466.0  
Diluted earnings per share (Rs)   27.3  
P/E ratio (x)   16.6  

What has driven performance in 1QFY10?
  • Wipro’s topline declined by 3% QoQ during 1QFY10 on account of slowdown in its IT business. IT services business which contributed 77% to the company’s total sales, declined by 2.2% QoQ, while IT product business (12% of sales) saw a revenue decline of 12% QoQ. Wipro’s consumer care and lighting business (8% to sales) grew by around 6% QoQ during 1QFy10. On a YoY basis, the company recorded a 5% growth in topline with IT services business and IT products business growing at 10% and 2% YoY respectively during 1QFY10. During the quarter, the company inked a number of large strategic deals across industry verticals and geographies. This includes a 9-year IT outsourcing contract with Unitech Wireless, and a number of deals in retail, semi-conductor packaging, and manufacturing sectors. It added 26 new clients during the quarter.

    Business-wise revenue breakup
    (Rs m) 4QFY09 1QFY10 Change
    IT Services 49,323 48,249 -2.2%
    IT products 8,698 7,602 -12.6%
    Consumer care &Lighting 5,164 5,463 5.8%
    Others 1,469 1,477 0.5%

  • In terms of geographies, the percentage share of the US declined to 43% in 1QFY10, from 45% in 4QFY09. The same for Europe declined from 22% to 20%. India continued to form 21% of Wipro’s revenue, with rest of the world contributing the remaining 16%.

    Geographical performance
    (Rs m) 4QFY09 1QFY10 Change
    India 13,612 13,207 -3.0%
    US 29,169 27,043 -7.3%
    Europe 14,261 12,578 -11.8%
    Rest of the world 7,779 10,063 29.4%
    64,821 62,891

  • Based on service offerings, Wipro’s business process outsourcing (BPO) business grew about 4% QoQ and 10% YoY in 1QFY10. The company also witnessed 8% QoQ growth in infrastructure management services segment aided by the integration of Infocrossing, a US based provider of IT infrastructure management services, into its IT business.

  • Wipro’s operating margins expanded by 0.5% QoQ during 1QFY10. This can be credited to containment of sales and general expense and better utilisation levels, aided by a push towards offshoring. Margins were also aided by favorable cross-currency movements. Improvement in margins was seen across all the business segments.

    Operating Margins
    Segment 4QFY09 1QFY10
    IT Services 20.9% 22.3%
    IT products 3.3% 4.2%
    Consumer care &Lighting 11.9% 14.4%

  • Wipro reported a marginal growth of 0.5% QoQ in net profits during 1QFY10. This was mainly aided by better operating margins and decreased outlays on interest and lower depreciation charges.

What to expect?
At the current price of Rs 451, the stock is trading at a multiple of 16.6 times our estimated FY11 earnings. While the company’s performance could be termed fair in a poor environment like what we are seeing now, the management has also sounded caution for the short to medium term future. It sees its clients remaining slow in their decisions with respect to discretionary spending on technology. However, the management is confident about retaining Wipro’s market position on account of strong deal pipeline which is spread across geographies and industry verticals. To propel growth in the medium to long-term, the company will revamp investment in newer technologies like cloud-computing, renewable energy and environment sector, where it sees a lot of traction building. We see the dark clouds of slowdown in tech spending to still take some time to recede on the horizon, especially given that the biggest tech spenders in the US and Europe are still reeling under significant financial constraints. At the current level, we maintain our positive outlook towards the stock from the long-term perspective.

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