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Wipro: A slow start to FY15
Jul 31, 2014

Wipro has announced its results for the first quarter of 2014-2015. The company has reported a 4.4% QoQ fall in sales and a 5.5% QoQ fall in net profits. Here is our analysis of the results.

Performance summary
  • Consolidated net sales fell by 4.4% QoQ during the quarter. The revenues increased 1.2% QoQ in US dollar terms. Thus the rupee appreciation impacted the company negatively in the quarter.
  • Operating margin fell by 1.3% QoQ to 22.9% during the quarter as compared to 24.2% seen during 4QFY14. On an absolute basis, the operating profit fell by 9.5% QoQ in the quarter.
  • Net profits fell by 5.5% QoQ. The sequential fall in net profits was largely attributable to the muted topline performance.

Consolidated financial performance
(Rs m) 4QFY14 1QFY15 Change
Gross revenues 116,535 111,358 -4.4%
Expenditure 88,355 85,851 -2.8%
Operating profit 28,180 25,507 -9.5%
Operating profit margin (%) 24.2% 22.9%  
Finance and other income  3,959  4,239 7.1%
Finance expenses 842  888 5.5%
Depreciation  2,880  2,834 -1.6%
Exchange difference 510  1,098 115.3%
Profit before tax 28,927 27,122 -6.2%
Tax  6,536  5,942 -9.1%
Profit for the period from continuing operations 22,391 21,180 -5.4%
Profit after tax for the period from discontinuing operations  - -  
Profit for the period 22,391 21,180 -5.4%
Minority interest 126  148 17.5%
Net profit available to equity shareholders 22,265 21,032 -5.5%
Net profit margin (%) 19.1% 18.9%  
No. of shares (m)    2,467.2  
Diluted earnings per share (Rs)*   33.5  
P/E ratio (x)*   16.2  
* On a trailing 12-months basis

What has driven performance in 1QFY15?
  • In 1QFY15 Wipro's revenues fell by 4.4% QoQ. The growth in sales in US dollar terms was 1.2% QoQ.

  • The IT Services and IT product segments witnessed a fall in sales 1% QoQ and 30.9% QoQ respectively.

  • In terms of service offerings, Global Infrastructure Services and BPO were the main drivers in the quarter while application development and maintenance and the product engineering and mobility were the laggards.

  • In terms of geographies, Wipro witnessed a muted performance in the US and in Europe while India, Middle East and rest of the world lead the way.

  • In terms of industry verticals, the highest growth was seen in the media, telecom and healthcare verticals while the only vertical that disappointed in this quarter was retail.

    Revenue breakup (In Rs m)
    Based on businesses 4QFY14 1QFY15 Change
    IT Services 106,193 105,083 -1.0%
    IT products 11,090 7,660 -30.9%
    Others (reconciling items) (238) (287)  
    IT services revenue breakup (Rs m) 4QFY14 1QFY15 Change
    Based on geography
    US 55,679 55,456 -0.4%
    Europe 33,407 32,962 -1.3%
    India and Middle East 9,800 10,134 3.4%
    Rest of the world 12,472 12,806 2.7%
    Based on service offerings
    Application Development and Maintenance 21,269 20,044 -5.8%
    Global Infrastructure Services 27,060 28,174 4.1%
    Business Application Services 31,737 31,960 0.7%
    Product Engineering & Mobility 8,018 7,795 -2.8%
    Advanced Technologies & Solutions 12,583 12,583 0.0%
    BPO 10,690 10,802 1.0%
    Based on verticals
    Global Media & Telecom 15,479 15,924 2.9%
    Finance Solutions 29,844 29,733 -0.4%
    Manufacturing & Hi-tech 20,044 20,267 1.1%
    Healthcare, Life Sciences & Services 11,804 12,027 1.9%
    Retail, Consumer goods & Transportation 16,147 15,590 -3.4%
    Energy and Utilities 18,040 17,817 -1.2%

  • Wipro's operating margin fell by 1.3% in the quarter. This was largely due to the poor topline performance. The company continues to cut down on costs (as a % to sales) related to subcontracting and SG&A.

  • The company's net margin fell to 18.9% in 1QFY15 from 19.1% seen in the last quarter. The sharp fall in net profit by 5.5% QoQ was mostly as a result the topline performance.
What to expect?
At the current price of Rs 545, the stock is trading at a multiple of 16.2 times its trailing 12 month earnings.

Wipro's performance was quite average in this quarter. The company faced client specific issues in the US relating to stalled projects which did not get restarted in the quarter as per the management's expectations. These issues are expected to be resolved only over the next few quarters.

However, the company's deal pipeline remains strong. The company won 6 large deals in the quarter. The management has stated that new digital technologies like SMAC are offering exciting opportunities for future growth.

Wipro won its largest ever software contract totaling US$ 1.2 bn just after the conclusion of 1QFY15. It has signed this 10 year deal with renowned North American Energy giant Atco. However the management did not provide further financial details as the regulatory requirements had not been completed.

Despite the client specific issues in the US, the management has stated that they were witnessing strong demand for IT services in the developed world. However clients continue to have increasing levels of expectations from their IT vendors.

We have updated the FY17 financial estimates for the company. While the long term prospects of Wipro are good, we recommend that investors do not buy the stock at current levels as the near term valuations are stretched.

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