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Wipro: Growth momentum continues

Jul 23, 2004

Introduction to results
Wipro has reported strong growth in its consolidated topline and bottomline for the first quarter of FY05. Also, a less than proportionate YoY growth on the expenditure front has enabled the company to improve its operating margins during the quarter. On a QoQ basis, profits have grown QoQ by 11.3%, despite a marginal fall in the topline.

Financial performance (Consolidated): A snapshot
(Rs m) 1QFY04 1QFY05 Change
Sales 11,867 17,671 48.9%
Other income 274 284 3.8%
Expenditure 9,381 13,256 41.3%
Operating profit (EBDIT) 2,486 4,414 77.6%
Operating profit margin (%) 20.9% 25.0%  
Interest 6 11 98.6%
Depreciation 404 514 27.3%
Profit before tax 2,350 4,173 77.6%
Tax 232 611 163.5%
Minority interest (4) (22) 510.4%
Equity in earnings of affiliates (54) 30 -159.4
Profit after tax/(loss) 2,061 3,569 73.2%
Net profit margin (%) 17.4% 20.2%  
No. of shares 232.8 698.4  
Diluted earnings per share* (Rs) 11.8 20.4  
P/E ratio (x)   26.4  
(* annualised)      

About the company
Wipro is the third largest software services exporter from the country and also has interests in the consumer care and lighting business. However, the largest contribution to its revenues come from the global IT services and products division (76% of consolidated revenues). Within the global IT services business, the company derives revenues from application development and maintenance (37% contribution), R&D services (32%), package implementation (11%) and systems integration and consulting (4%). The company also provides BPO services through its subsidiary, Spectramind (10% of global IT services revenue).

Global IT services drives 1QFY05 performance
Sales: Revenues from the global IT services division of the company have grown YoY by 45% and this is a major reason for the strong consolidated topline growth. India & AsiaPac IT services and products division (68% YoY growth) and consumer care and lighting division (31% YoY) have also aided this growth. Stable billing rates and strong growth in volumes has resulted into a robust growth in the company's global IT services division. The company added a net of 3,015 employees during 1QFY05 and the base now stands at 31,517. Continued strong addition to the employee base is indicative of the fact that Wipro is anticipating strong growth for its services going forward.

Operating margins: Wipro's operating margins have improved by a substantial 410 basis points in 1QFY05 and this seems mainly a result of decline in selling & marketing and general & administrative expenses. While the former have declined as a percent of revenues 11% in 1QFY04 to 8% in 1QFY05, the decline in the latter is from 8% to 6%. An increase in offshore contribution also seems to be a reason behind the improvement in margins. This is due to the fact that despite offshore services having lower billing rates than onsite services, they have better margins than the latter. While the company has improved upon its operating margins for the global IT services division, margins for the other two divisions have declined.

Net profits: Strong growth in topline and a lower corresponding growth on the expenditure front have helped Wipro post an even stronger profits growth during 1QFY05. The graph below is indicative of the strong momentum that Wipro has attained in growing its topline on a YoY basis. Particularly, strong operating margin expansion in the IT services business has resulted in this robust profits growth for Wipro. As a matter of fact, margins for this business have improved from 21% in 1QFY04 to 27% currently.

What to expect?
At the current price of Rs 540, the stock is trading at a P/E multiple of 26.4x annualised 1QFY05 earnings. The management has projected global IT services revenues to be US$ 318 m for 2QFY05, QoQ growth of around 7%. This seems achievable considering the volume growth momentum and stable pricing environment of current times. However, considering that the company increases revenue contribution of low margin BPO services going forward, overall margins could come under pressure. Also, the fact that the stock continues to trade at a significant premium to its peers, investors need to practice caution.

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