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Wipro: Improved performance - Views on News from Equitymaster
 
 
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  • Oct 17, 2003

    Wipro: Improved performance

    Wipro has reported a 29% growth in revenues and 4% growth in profits on a YoY basis in 2QFY04. Also, while revenue growth for 1HFY04 has been at a similar rate of 29%, profits have risen by around 20%. The company continues to face pressure on the operating margins front (down 500 basis points, both for the quarter and the half-year).

    Financial performance: A snapshot
    Rs m 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
    Sales 10,621 13,745 29.4% 19,923 25,735 29.2%
    Other Income 165 197 19.4% 307 343 11.7%
    Expenditure 8,231 11,275 37.0% 15,345 21,060 37.2%
    Operating Profit (EBIT)** 2,390 2,470 3.3% 4,578 4,675 2.1%
    Operating Profit Margin (%) 22.5% 18.0%   23.0% 18.2%  
    Interest - -   - -  
    Depreciation - -   - -  
    Profit before Tax 2,555 2,667 4.4% 4,885 5,018 2.7%
    Extraordinary items (23) 6   (667) (48)  
    Minority interest 21 11   24 14  
    Tax 307 360 17.3% 549 592 7.8%
    Profit after Tax/(Loss) 2,204 2,302 4.4% 3,645 4,364 19.7%
    Net profit margin (%) 20.8% 16.7%   18.3% 17.0%  
    No. of Shares 232.5 232.5   232.5 232.5  
    Diluted Earnings per share* (Rs) 37.9 39.6   31.4 37.5  
    P/E Ratio (x)   35.5     37.5  
    (* annualised)            
    ** includes depreciation            

    On a sequential basis, Wipro’s revenues have improved by around 11% while profits are also up by an equal amount. This rise in revenues could be largely attributed to the growth in volumes (11%). On the pricing front, while offshore prices increased by 0.1% sequentially, the rise onsite has been 2.2%. Though billing rates have increased for Wipro, on the offshore front, when compared with Infosys, the rise in on the lower side. Just to put things in perspective, Infosys saw a 2.3% and 1.4% rise in offshore and onsite prices in 2QFY03.

    On a YoY basis, revenue growth for 2QFY04 was mainly a result of increased revenues from global IT services that were up by around 43% on a YoY basis. The company has continued to increase its focus on this segment and has acquired a few companies in FY03 to make further inroads into markets for ITES (Spectramind), consulting (NerveWire) and telecommunication (Ericsson’s R&D Labs). Among other segments, while revenues from Asia-Pacific IT services declined by over 1% in the September quarter, those from consumer care and lighting grew by 10%.

    Revenue contributors…
    Rs m 2QFY03 2QFY04 Change
    Global IT services & products 7,222 10,309 42.7%
    % of revenues 68.0% 75.0%  
    India & Asia-Pacific IT services 2,230 2,199 -1.4%
    % of revenues 21.0% 16.0%  
    Consumer care & lighting 743 825 10.9%
    % of revenues 7.0% 6.0%  
    Others 425 412 -2.9%
    % of revenues 4.0% 3.0%  
    Total revenues 10,621 13,745 29.4%

    Wipro Technologies (Global IT services & products)
    Wipro’s focused efforts to grow its IT services business is reflected in higher revenue contribution (75% of revenues in 2QFY04 from 68% in 1QFY04). Revenue growth for this segment is a result of 38% YoY growth in its Enterprise Solutions business that now contributes to around 59% (60% in 2QFY03) of Wipro Technologies revenues. Also, growth in revenues from R&D services has also provided a fillip. Notably, R&D services had been a pressure point for Wipro in the recent past owing to reduction in spending by the company’s client’s i.e. global telecom majors.

    Despite this growth in revenues, the PBIT margins for this segment have declined substantially by around 830 basis points. This is mainly due to rising expenditure towards personnel, selling and marketing initiatives. 2QFY04 also saw Wipro adding 3,091 employees, which comprised of 2,030 added in the ITES segment. This takes the total employees for Wipro Technologies to 24,625 by the end of September 2003. The company has also hiked its average compensation by around 12% for offshore employees. During the quarter, Wipro added 35 new customers (15 in R&D services and 20 in Enterprise Solutions).

    Wipro Infotech (India & Asia Pacific IT Services & Products)
    Revenues from this segment accounted for around 16% of total revenues (21% in 2QFY03), and declined by over 1% on a YoY basis. However, the PBIT margins for this segment witnessed an improvement of around 110 basis points. The services business grew by 22% YoY and contributed to around 31% of the segment’s revenues.

    At the current market price of Rs 1,406, the stock is trading at a P/E multiple of 37.5x annualised 1HFY04 earnings. The management has projected revenues of US$ 241 m for 3QFY04 for its global IT services business (including ITES), which is a growth of around 9% sequentially. As the company’s integration with its acquired entities goes through, higher revenues are expected from high-end services like IT consulting and package implementation. However, margin pressure is likely to continue owing to salary hikes and increased marketing expenditure. But till the time clarity regarding Wipro’s inorganic initiatives emerges, investors need to practice caution. It has to be remembered that Wipro is trading at significantly higher valuations compared to its peers.

     

     

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