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Wipro: Beats expectations on topline

Oct 18, 2001

Wipro has posted a strong performance for 2QFY02. On a sequential basis, the company’s topline has grown by 11% and the bottomline has risen by 4%. On a YoY basis, the revenues have grown by 18% and the growth in net profits is 40%. While the bottomline is more or less in line with expectations, the topline is far beyond what the markets had expected. The operating margins have come down marginally by about 20 basis points. This is due to the lower operating margins for Wipro Technologies (contributes 66% to Wipro’s revenues), which has seen lower realisation in product sales and also the drop in employee utilization rate by 7%. Wipro Infotech contributed 20% to the revenues and the contribution of the consumer care & lighting division was 9%.

It may seem that on a sequential basis the profits have grown on the back of other income. The other income component in 2QFY02 was Rs 247 m compared to Rs 94 m in 1QFY02. However, a point that also has to be taken into consideration is that in 1QFY02 Wipro had negative financial expenses (income) of Rs 207 m compared to which in the second quarter it has an expense of Rs 11 m. In light of the above, the other income jump gets netted off.

(Rs m) 1QFY02 2QFY02 Change
Sales 7,852 8,743 11.3%
Other Income 97 247 154.6%
Expenditure 5,617 6,272 11.7%
Operating Profit (EBDIT) 2,235 2,471 10.6%
Operating Profit Margin (%) 28.5% 28.3%  
Interest (207) 11  
Depreciation 311 344 10.6%
Profit before Tax 2,228 2,363 6.1%
Tax 151 206 36.4%
Profit after Tax/(Loss) 2,077 2,157 3.9%
Net profit margin (%) 26.5% 24.7%  
Diluted number of shares 231.9 231.9  
Diluted Earnings per share* 35.8 37.2  
P/E (at current price)   31.0  
*(annualised)      

The highlight of the performance is that Wipro Technologies has posted a sequential growth of 9% for 2QFY02. This is a significant jump compared to 1QFY02, when the division had posted a sequential growth of about 0.8%. There were fears that the R&D group of Wipro Technologies might post a sequential dip in topline due to a significant exposure to telecom equipment manufacturers for its revenues. But the performance has allayed all fears. What is even more positive is that the management has gone ahead and given guidance for a sequential growth of 5% in revenues for Wipro Technologies for the third quarter. The impact of the September 11th tragedies will be felt in the third and fourth quarter of FY02. The guidance is a very positive considering Infosys has given and guidance of about 2% sequential growth.

Global IT services division (Rs m) 1QFY02 2QFY02 Change
R&D group 2,709 2,955 9.1%
Enterprise solutions group 2,188 2,387 9.1%
Support services 313 341 8.9%
Total 5,210 5,683 9.1%

However, a closer look into the numbers of the R&D group shows signs of strain. The revenues from Telecom & Internet and Embedded Systems & Internet Access practice have shown a decline. These are the practices that give Wipro a cutting edge above the rest. However, the Telecom & Internet Service Provider practice has shown a strong growth. Thus, while Wipro has managed to avoid a sequential dip in revenues, the concerns still linger. The dip in revenues from these areas might impact the margins as these areas traditionally have higher margins.

R&D group 1QFY02 2QFY02 Change
Telecom and Internet working 1,563 1,421 -9.1%
Embedded Systems and Internet Access 990 852 -13.9%
Telecom and Internet Providers 156 682 336.3%
Total 2,709 2,955 9.1%

The company has managed to improve billing rates by 16% for offshore and 20% for onsite projects on a YoY basis. The new clients added during the quarter numbered 26 and the list included Citibank, HSBC Group, Johnson Control, Matsushita, Micron Technology Inc., Emerson Motors and Phillip Morris.While revenues from top five clients in 2QFY01 were 10%, the figure has come down to 8% for 2QFY02. The decline for revenues from top ten clients was from 33% in 2QFY01 to 30% in 2QFY02.

Another positive was that Wipro has been significantly decreasing its exposure to the US. In 2QFY02 only 55% of the revenues were from the region, compared to 65% in 2QFY01. Revenues from Europe have gone up from 27% in 2QFY01 to 39% in 2QFY02. Revenues from Japan contributed to 7% of the revenues.

Wipro for the second consecutive quarter saw a decline in number of employees. The company has been realigning the number of employees in line with the expected demand, which is uncertain considering the tough economic environment.

The company has also made plans to invest Rs 727 m (US$ 15 m) in IT enabled services companies. Wipro is following the HCL path of inorganic growth; the investments will cause revenues to come in as other income. Wipro has already finalized the investment of US$ 10 m (Rs 482 m) in Spectramind Services Private Ltd. for a 17% equity stake and preference shares converting to 7% of equity. Wipro will leverage on Spectramind to provide services in the domains of remote processing and BPO.

At the current market price of Rs 1,155 the stock is trading at a P/E multiple of 31 times it 2QFY02 annualised earnings. The performance is a very strong one and should improve valuations in the near future.


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