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Wipro: US$ 1 bn, and counting… - Views on News from Equitymaster
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Wipro: US$ 1 bn, and counting…
Oct 19, 2005

Introduction to results
Wipro has reported its consolidated results for the second quarter and half-year ended September 2005. Consolidated revenues have shown a strong sequential performance, managing a near-double digit growth. Revenues from the global IT services business has shown strength, driven by strong volume growth and margin expansion. Billing rates have declined this quarter. However, a higher-than-proportionate rise in total expenditure, despite savings in employee costs and S&M costs has resulted in consolidated margins slipping by 60 basis points. Considerably higher other income due to forex gains (compared to a loss last quarter) has helped shore up the bottomline. The half-yearly performance has been decent as well.

Financial performance (Consolidated): A snapshot
(Rs m) 1QFY06 2QFY06 Change 1HFY05 1HFY06 Change
Sales 22,718 24,941 9.8% 37,556 47,659 26.9%
Expenditure 17,253 19,074 10.6% 27,823 36,327 30.6%
Operating profit (EBDIT) 5,465 5,867 7.4% 9,733 11,332 16.4%
Operating profit margin (%) 24.1% 23.5%   25.9% 23.8%  
Other income 122 415 239.6% 360 537 49.1%
Interest 7 2 -62.1% 27 9 -66.4%
Depreciation 727 751 3.3% 1,085 1,479 36.3%
Profit before tax 4,853 5,528 13.9% 8,982 10,382 15.6%
Tax 628 831 32.3% 1,313 1,459 11.1%
Minority interest (1) -   (45) (1)  
Equity in earnings of affiliates 56 83   62 139  
Profit after tax/(loss) 4,280 4,780 11.7% 7,686 9,060 17.9%
Net profit margin (%) 18.8% 19.2%   20.5% 19.0%  
No. of shares 1,393.8 1,423.1   1,392.5 1,421.1  
Diluted earnings per share* (Rs) 12.0 13.5   10.8 12.8  
P/E ratio (x)         29.3  
(* annualised)            

About the company
Wipro is India’s third largest software services exporter and also has interests in the hardware and consumer care and lighting (CC&L) businesses. However, the largest contribution to its revenues comes from the global IT services and products division (76% of consolidated revenues). Within the global IT services and products business, the company derives revenues from R&D services (33%), enterprise business (57%) and BPO services (10%). The company provides BPO services through its subsidiary, Wipro BPO Services.

What has driven performance in 2QFY06?
Strong revenue growth across segments: As has been the case in the recent past, Wipro’s Global IT services segment (76% of consolidated revenues in 2QFY06) continues to be the major engine of growth for the company. This segment grew by a strong 9.4% sequentially. The major drivers of this strong growth have been a double-digit growth in both onsite as well as offshore volumes and this has ensured that despite the fall in billing rates, revenue growth has been robust. Offshore volumes grew by 12.0% and onsite volumes by 10.0% sequentially. Billing rates, on the other hand, sequentially declined by 0.8% onsite and 2.1% offshore.

Key growth verticals, such as financial services and the technology business also saw good traction. Technology is a major business for Wipro and it has grown at a strong 7.7% sequentially, while the telecom business has shown an impressive 33.7% QoQ growth. In terms of service lines as well, robust growth was witnessed in services like technology infrastructure services, testing services and package implementation. The bread-and-butter ADM business also grew by nearly 10% QoQ. In terms of geographies, Europe saw a double-digit sequential rate, while the key US market was also strong.

However, the revenues of the BPO business (10% of the Global IT services revenues) declined by 1.8%. The management has clearly indicated that this business is undergoing a transition phase and this is expected to continue for the next few quarters. The non-voice component is being built up and the percentage contribution of these services to the BPO business increased by one percentage point. The margins, however, improved by a significant 400 basis points to 13% from 9% in 1QFY06.

Wipro added 39 new clients in the quarter, including 2 in BPO. The total number of active clients now stands at 433 in IT services and 28 in BPO. The company added a record 4,575 people in IT services, while the BPO segment continued with its restructuring, reducing headcount by 651 people. The total headcount in IT services now stands at 32,856 people and in BPO at 12,979 people. Attrition, however, increased to 14% from 13% in 1QFY06 and utilisation fell to 70% from 72%.

The other segments of Wipro also grew at a good pace, with the India, Middle East and AsiaPac business growing at an impressive 17.7% and the Consumer Care & Lighting business (CC&L) growing at 5.4% sequentially. On a YoY basis, the India, Middle East and AsiaPac business grew at 32% and CC&L grew at 24%.

Higher expenses dent margins: Wipro’s total expenditure grew at a faster-than-proportionate rate than sales, leading to a 60 basis points contraction in margins. However, if we take a segmental view, the PBIT margins for the global IT services business increased by 40 basis points to 24.4% and CC&L margins also expanded. Wipro managed to reduce employee costs as a percentage of total revenues from 43.9% in 1QFY06 to 42.3% this quarter. Selling and marketing (S&M) expenses also reduced as a percentage of revenues by 70 basis points. However, expenses on account of purchase of finished products for sale soared to 8.0% of sales, compared to 3.2% of sales in 1QFY06, which resulted in total expenditure as a percentage of sales rising and thus, impacting margins.

Forex gains positively impact net profit: A massive increase in other income, due mainly due to Rs 107 m profit on account of exchange fluctuations (loss of Rs 117 m in 1QFY06) has shored up the company’s net profit, which rose by a strong 11.7% sequentially.

Performance in the recent past…
  3QFY05 4QFY05 1QFY06 2QFY06
Sales growth (%, QoQ) 5.8 9.4 (1.3) 9.8
Profits growth (%, QoQ) 3.7 1.5 (1.2) 11.7

What to expect?
At the current price of Rs 373, the stock is trading at a price to earnings multiple of 17.2 times our estimated FY08 earnings. During the quarter under review, the company exceeded its guidance for the global IT services business, growing to over US$ 430 m as compared to the guidance of US$ 422 m. Wipro’s management expects revenues from the global IT services division to grow sequentially by over 7% in 3QFY06 to US$ 463 m.

The company’s performance in the BPO segment is expected to remain subdued over the next few quarters, as indicated by the management. This is due to the fact that Wipro is undergoing a restructuring in this business and working on increasing the component of the non-voice business. This currently stands at 16% and the management has said in the conference call that this is expected to grow to considerably higher levels, going forward. Prospects for the global IT services business appear strong, with increasing acceptance of offshoring and greater traction in Europe. R&D services, a major service line for Wipro, is seeing an up tick, as telecom players, semiconductor companies, etc make more investments in developing new products, such as mobile convergence, multimedia and gaming, and the offshoring component is also high in these services, providing a possible margin upside.

We continue to expect players like Wipro to be among the foremost beneficiaries of the Indian offshoring story, simply based on its size, scalability advantages and execution capabilities. We will update our research report on Wipro after a conference call with the management.

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