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From a middling FMCG to an IT giant, there's no looking back for Wipro. - Views on News from Equitymaster
 
 
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  • Sep 18, 1999

    From a middling FMCG to an IT giant, there's no looking back for Wipro.

    It's hard to believe that a small vegetable oil and soap company, which had many a time been dubbed an "also ran", could shift its focus 35 years after its inception and over the next 20 build itself into India's largest information technology company. Yes, Wipro Ltd., with sales of Rs 17,818 m in '99, (sales turnover Rs.14,269 m in '98) has come a long way since it decided to reengineer its business plan.

    Set up in 1945 by the Premji family, and still closely owned by the promoters who control 77 per cent of the stock today, Wipro entered the IT business as a computer hardware manufacturer through its subsidiary, Wipro Infotech. A little over a decade later, in the 90s, it expanded the scope of its IT operations by venturing into software exports through Wipro Systems - a move which has proved to be the major turning point in its history. The company has not looked back since and is today India's second largest software exporter, trailing only Tata Consultancy Services.

    Apart from IT, Wipro has interests in the consumer care, lighting and fluid power businesses. It also dabbles in leasing and hire-purchase services through its subsidiary, Wipro Finance.

    IT's the way...
    Wipro's IT business embraces software, hardware and systems integration.

    Software
    On the software front, Wipro has acquired expertise in re-engineering, maintenance, migration and development. Over the years, it has come to specialise in solutions for the telecom, healthcare, retail, and utilities sectors, a business which accounts for over 65% of revenues - by far the largest contributor to the company's bottomline. Although Wipro's software services are not vastly different from those of its competitors, its scores over them simply on the strength of its versatility.

    Quality of software development has also been one of Wipro's guiding principles, and this has enabled it to achieve the Software Engineering Institute (SEI) Level 5 of the Capability Maturity Model (CMM), a much coveted distinction for software companies across the world. In India, Satyam Computers is the only other company to have achieved this position.

    In recent times Wipro's software services portfolio has expanded to include enterprise resource planning (ERP) and Euro solutions. It has also acquired expertise in data warehousing, one of a handful of Indian companies to offer such services today. And 1996 marked Wipro's foray in e-commerce applications where this lucrative business now accounts for 10-11% of software revenues.

    With its gamut of software services, it is not surprising that Wipro has earned the trust and confidence of many Fortune 500 companies. Allied Signals, Amex, General Electric, Nokia, Lucent Technologies, Putnam and Nortel have all at some point sought Wipro's expertise for software development.

    Hardware and others
    While software may have overtaken hardware as far as the company is concerned, Wipro nevertheless continues to find a place of pride amongst India's leading PC vendors. Besides marketing its own range of personal computers, it set up a joint venture with Acer of Taiwan for marketing the latter's range of PCs in India. After a five-year stint, the arrangement with Acer was called off last year, and currently both companies are marketing their own PC brands. However, Wipro continues to market Acer's notebooks.

    Apart from marketing a wide range of printers, from dot-matrix and line-matrix to laser and ink-jet, Wipro also markets Sun Microsystems' workstations and servers in India

    Non IT's important too..
    Wipro's non-IT product portfolio is truly diverse. It ranges from consumer care to lighting to fluid power.

    The consumer care division offers soaps and toiletries (sold under the brand names of Santoor and Shikakai), baby-care products, and vanaspati (Sunflower). It also manufactures and markets lighting products for consumer, commercial and industrial markets. In the fluid power business, Wipro manufactures hydraulic cylinders for construction equipment and truck-tipping systems.

    Focus on IT pays off
    Wipro's focus on IT has proved to be the turning point in its fortunes. Sales for the year ended March 1999 grew by a spectacular 25 per cent to Rs 17.8 bn (US$ 414 m). Growth at the bottomline was a far healthier 59 per cent to Rs 1,702 m (US$ 40 m). Investors and fund managers have lapped up the stock to take it to amazing levels of over Rs 5,000 per share. The market value of the company has jumped from a mere Rs 7.3 bn in financial year 1996 to over Rs 234 bn in the current year.

    In addition to the investors, Wipro's rise in market value has put a broad smile on Mr. Azim Premji's face. Mr Premji - the promoter of Wipro, owns 77 per cent of the stock. A recent survey on global billionaires conducted by a leading international business magazine, has calculated Mr. Premji's holding in Wipro at about Rs 180 bn, catapulting him to India's richest individual.

    The road ahead...
    Wipro has lined up plans to invest close to Rs 2 bn per annum over the next two to three years. Not surprisingly, more than 70 per cent of this amount will be invested in the IT business, Wipro's golden goose.

    The company has also acquired an Internet Service Provider (ISP) licence through which it plans to corner the business-to-business segment of this lucrative new emerging market. The ISP venture has been spun off into a separate JV - Wipro Net, in association with KPN (Royal Dutch Telecom). From a total equity capital of Rs 250 m, Wipro will contribute Rs 137.5 m to the JV. The company has also identified the Internet and e-commerce as a major thrust area and has made sizeable investments in this business.

    Concerns
    To sustain the scorching growth rate over the next few years, the company may need to make some strategic acquisitions, both in India and abroad. This could lead to dilution of equity and is one area of speculation amongst analysts.

    In addition, Wipro's finance arm, Wipro Finance, may prove to be a spot of bother for the company. In the second quarter of the current financial year, Wipro made a non-recurring provision of Rs 581 m related to its investments in Wipro Finance. This could be further pressure on Wipro to provide for an additional Rs 350 m in early 2001, if ICICI - an investor in Wipro Finance decides to offload its preference shares in the company.

    Wipro's competitiveness in its non-IT businesses like baby care, soaps and toiletries, vanaspati, and lighting is limited to offering cost-efficient products. Wipro has failed to command market leadership in any of these segments. In fact, in all these segments Wipro competes with MNCs, like Johnson & Johnson (baby care), Procter & Gamble (soaps), Philips (lighting), General Electric (lighting) and Hindustan Lever (soaps and vanaspati) who command total control over their respective segments. So far in its FMCG business, Wipro has had limited success in differentiating itself from the competition, and has scored only in cost competitiveness.

     

     

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