Wipro has so far held out against the pack, it earnings guidance and strategy have been quite bold considering the state of affairs. The company’s has maintained that its topline growth will beat the sector average. On the strategy front the company has made a conscious effort not to give into the ‘pricing’ game. A lot of smaller players in the industry have resorted to under cutting to bag projects, which has caused a pricing pressure on the industry as a whole.
Infact in the first quarter of FY02 the company had managed to improve billing rates by 3.4% for offshore projects and 2.6% for onsite projects sequentially. Consequently, the topline for Wipro Technologies had grown by a marginal 0.8% as volumes suffered on account of pricing policy. Thus, the key figure to watch out for 2QFY02 results would be the topline growth for Wipro Technologies. We expect a topline growth of 1.3% for this division of the company. This is based on the assumption that while the revenues from the R&D group will decline marginally, revenues from enterprise applications and support services will show sequential growth. The support services group is expected it show a strong growth, as IT spending has been limited to mission critical areas like infrastructure and maintenance. The de-growth for the R&D group is expected due to its large dependence on telecom equipment manufacturers like Nortel. These companies have been suffering in wake of the economic slowdown and therefore, are likely to cut their outsourcing budgets.
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Enterprise solutions group
During the quarter, the most important achievement for the company was probably getting Bluetooth certification for its profile in the area. Wipro became the second company in the world to have all thirteen Bluetooth profiles (Version 1.1) with product qualification status from the Bluetooth Qualification Body (BQB). Wipro’s competitive advantage lies in the fact that the company not only provides a complete set of Bluetooth IP solutions but can also leverage its embedded design capabilities to give the customers an end-to-end solution. Such design services are supported by the company’s strategic alliances with ARM and Symbian, as well as with library vendor Artisan and foundry partner TSMC. Also, Wipro has the time advantage over its competitors. However, it will be quite sometime before the company reaps the benefits of its efforts in the area.
Wipro entered into an alliance with 3DSP Corporation, to supply 3DSP’s DSP (digital signal processing) or IP-related products and services. The two companies are currently partnering the development of MPEG-4 Video software and will enhance the partnership going forward to build other wireless and video applications on the 3DSP platform.
The enterprise solutions group continued to strengthen its presence in the SI (systems integration) arena. Wipro got a SI contract of the size of US$ 70 m for a telecom subsidiary of Lattice Group Plc. during the quarter. The size of the contract is easily one of the biggest for the Indian software industry. The company is expected to earn about US$ 30 m (Rs 1,455 m) from the project during second half of the fiscal 02. To consolidate further, the company has entered into a worldwide strategic alliance with HP to jointly develop and deploy network management solutions addressed to telecom service providers or carriers. The carriers are in a much better shape in the telecom segment as compared to the equipment manufactures as the need to communicate has had a lower impact as compared to the demand for new equipment.
Wipro got a new CRM project from nPower during the quarter. In an earlier engagement with nPower, Wipro played a crucial role in supporting nPower’s business critical Siebel eEnergy application. In the new project Wipro will sustain this CRM system.
The revenues in 2QFY02 are expected to post a sequential growth of about 9%. This is mainly due to the cyclical nature of Wipro’s hardware business. The hardware business is expected to show a sequential growth of 23% (YoY decline of 14%). This would increase the contribution of the Wipro Infotech to the revenues. Consequently, the operating margins for the company would decline.
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The management’s future outlook will of course be something that the markets will be waiting for. With a 0.8% growth (for Wipro Technologies) in 1QFY02 and growth in similar lines for the 2QFY02, it is going to be a very tough task for the company to beat the sector growth rate, which according to our estimates will be about 25% (35% according to Nasscom). Considering Wipro Technologies has revenues of Rs 17,690 m in FY01, a 25% growth for FY02 would mean the company needs to earn revenues of Rs 22,113 m. Assuming a 1.3% growth revenues for 1HFY02 would total to Rs 10,488 m, leaving Rs 11,625 m to be earned in the next two quarters and considering that the business environment has deteriorated post September 11 attacks it is very unlikely that the 2HFY02 is going to be more positive than the first half. Therefore, the management may lower its earnings guidance.
That is for this fiscal. However, when looking at companies like Wipro one needs to understand that the company is a leader in technology related software. It will undoubtedly play a very important role in the evolution on technology in the future. The US$ 70 m (Rs 3,395 m) contract is an indication of things to come. Clients are now outsourcing larger contracts to established companies like Wipro. Thus, it seems that the software majors will be beneficiaries of the slowdown, in the long run.
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