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Wipro: Strong growth in IT services

Oct 18, 2002

Wipro (on a standalone basis) has posted a 3% YoY decline in bottomline for 2QFY03. This includes an extra-ordinary income of Rs 17 m during the quarter. The topline grew by 13% YoY. The decline in bottomline is due to operating margins heading south and a steep fall in other income. While the company has seen a steep decline in raw material costs, increased SGA (selling and general administration expenses) and higher other expenses has taken a toll on the company’s operating margins. The decline in operating margins largely stems from the company’s global IT services business that has seen a 4% decline in operating margins YoY.

(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Sales 8,743 9,879 13.0% 16,595 18,942 14.1%
Other Income 247 170 -31.2% 344 368 7.0%
Expenditure 6,272 7,380 17.7% 11,889 14,111 18.7%
Operating Profit (EBDIT) 2,471 2,499 1.1% 4,706 4,831 2.7%
Operating Profit Margin (%) 28.3% 25.3%   28.4% 25.5%  
Interest 11 5 -54.5% (196) 13  
Depreciation 344 313 -9.0% 655 634 -3.2%
Profit before Tax 2,363 2,351 -0.5% 4,591 4,552 -0.8%
Tax 206 278 35.0% 357 509 42.6%
Extra-ordinary item - 17   - (288)  
Profit after Tax/(Loss) 2,157 2,090 -3.1% 4,234 3,755 -11.3%
Net profit margin (%) 24.7% 21.2%   25.5% 19.8%  
Diluted number of shares 231.9 231.9   231.9 231.9  
Diluted Earnings per share* 37.2 36.1   36.5 32.4  
P/E (at current price)   41.1     45.7  
*(annualised)            

On a consolidated basis, the company’s revenues grew by 21% YoY and the bottomline grew by 2% YoY. The consolidated numbers for the company this quarter include numbers for Spectramind, a call centre company that Wipro acquired in 1QFY03.

Business group % Of consolidated revenues Operating Margins Revenue growth (YoY)
Global IT services (Wipro Technologies) 64.0% 30.0% 7.0%*
IT enabled services (Spectramind) 4.0% 21.0% -
India & Asiapac IT Services & Products (Wipro Infotech) 21.0% 5.0% 15.0%
Consumer healthcare and lighting 7.0% 15.0% -5.0%
Wipro Healthcare and Life Sciences 2.0% - 82.0%
Others 2.0% - -
Total 100.0% - -
*QoQ

Global IT services (Wipro Technologies)
Wipro Technologies has posted a strong performance for 2QFY03. The revenues have grown 7% sequentially in rupee terms. In dollar terms, the growth works out to be 11%, backed by strong 12% volume growth. The group accounted for 64% of Wipro’s consolidated revenues. This is marginally lower as compared to 68% in 1QFY03. The decline is due to revenues of Spectramind being included in the consolidated numbers.

Thus, the topline growth indicates that the company witnessed a 1% decline in blended billing rates. While Infosys managed a similar volume growth for the quarter, its revenue growth was higher on the back of a 4% sequential rise in billing rates. For Wipro, the sequential fall in billing rates was 2.7% for offshore projects and 0.1% for onsite projects. This translates into a YoY decline of 7.2% for offshore projects and an 8.6% fall for onsite work. However, Wipro’s management has indicated of an easing in pressure on billing rates.

The decline in billing rates has resulted in operating margins falling to 30% for the IT services business, a drop of 1% compared to 1QFY03. However, YoY the operating margins have declined by a steep 4%. Operating margins is another area where Infosys scored over Wipro in 2QFY03. Infosys managed to improve operating margins despite the tough business environment. Of the total Wipro Technologies revenues, 48% came from offshore projects, while the remaining 52% came from onsite projects. The onsite offshore mix was the same for 1QFY03.

(Rs m) 1QFY03 2QFY03 Change
R&D Services 3,097 2,716 -12.3%
% of revenues 49.0% 40.0%  
Enterprise Solutions 3,224 4,075 26.4%
% of revenues 51.0% 60.0%  
Wipro Technologies 6,321 6,791 7.4%

The revenues from the R&D services business continued to decline. Consequently, the contribution from the group to revenues of Wipro Technologies declined from 49% in 1QFY03 to 40% in 2QFY03, a drop of 12%. However, this was offset by a strong growth in revenues from the enterprise solutions. The R&D group caters to clients from the beleaguered technology sector. This includes telecom equipment manufacturers and service providers. Due to the technology meltdown, the sector is passing through a rough patch and therefore IT spends from these clients are the worst hit. However, going forward, when the situation improves and projects start to flow in, Wipro is one of the very few companies that have domain expertise and the size to make most of the opportunity.

The company added 30 new clients during the quarter as compared to 22 in 1QFY03. The company also won two orders for total product ownership from its clients. The customers with annual billing of US$ 5 m and above increased from to 27 compared to 24 in 2QFY02. Geographic revenue mix continued to tilt in favour of the US. Revenues from the US geography grew sequentially by 11%, while the growth from Europe was 7%. Revenues from Japan declined by 8% QoQ.

India & AsiaPac IT Services and Products (Wipro Infotech)
The revenues from the company’s domestic hardware and services business grew by 17% YoY. However, due to increasing competition especially in the hardware segment the company witnessed a 2% decline in operating margins. The fall in operating margins could also have been due to decline in the contribution from services. The contribution of services fell significantly from 32% of revenues in 2QFY02 to 25% in 2QFY03. Client wins for this business group included Colgate Palmolive India.

Revenue guidance & outlook
The management has indicated a strong 8% sequential growth in revenues for 3QFY03. The revenues from Spectramind are expected to grow by 43% sequentially. The call centre subsidiary has 8 existing customers.

At the current market price of Rs 1,480 the stock is trading at a P/E multiple of 46x its 1HFY03 annualised earnings. While the company has posted a strong growth in revenues, declining margins are a cause for concern. Peers like Infosys have aggressively cut corners to not only hold onto, but also to improve margins in a similar business environment. Further, the company’s bottomline growth does not justify the significantly high valuations. These valuations are also due to technical reasons like low liquidity. Thus, the element of risk is significantly high. However, Wipro is at a significant vantage point to make the most of the increased interest in outsourcing to India.


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