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Wipro: One up on peers - Views on News from Equitymaster
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Wipro: One up on peers
Oct 19, 2007

Performance summary
  • Topline grows by 12% QoQ during 2QFY08, driven by 8% QoQ growth in volumes and 2% QoQ growth in billing rates. Global IT services segment grows at 10% QoQ.

  • Operating margins expands by 0.6% QoQ mainly due to higher growth in volumes and pricing and better utilisation inspite of wage hikes.

  • Bottomline expands by 14% QoQ largely due to expansion in operating margins.

  • Declares interim dividend of Rs 2 per share (dividend yield of 0.4%).

(Rs m) 1QFY08 2QFY08 Change 1HFY07 1HFY08 Change
Sales 42,360 47,574 12.3% 67,032 89,934 34.2%
Expenditure 34,135 38,075 11.5% 51,151 72,210 41.2%
Operating profit (EBDIT) 8,225 9,499 15.5% 15,881 17,724 11.6%
Operating profit margin (%) 19.4% 20.0%   23.7% 19.7%  
Other income 1,243 1,262 1.5% 1,171 2,505 113.9%
Interest 131 330 151.9% 36 461 1180.6%
Depreciation 1,176 1,245 5.9% 1,877 2,421 29.0%
Profit before tax 8,161 9,186 12.6% 15,139 17,347 14.6%
Tax 1,005 1,046 4.0% 2,091 2,051 -1.9%
Minority interest (3) (1)   1 (4)  
Share of earnings in associates 97 96 -1.0% 157 193 22.9%
Profit after tax/(loss) 7,256 8,237 13.5% 13,205 15,493 17.3%
Net profit margin (%) 17.1% 17.3%   19.7% 17.2%  
No. of shares (m)       1,458 1,457  
Diluted earnings per share (Rs)*         21.8  
P/E ratio (x)*         22.8  
* On a trailing 12-months basis

About the company
Wipro is India’s third largest software services exporter and also has interests in the hardware and consumer care and lighting businesses. However, the largest contribution to its revenues comes from the global IT services and products division (74% of consolidated revenues). Within the global IT services and products business, the company derives revenues from R&D services (30% of global IT services revenues), enterprise business (61%) and BPO services (9%). The company provides BPO services through its subsidiary, Wipro BPO Services. Over the period FY02 to FY07, Wipro’s consolidated revenues and profits grew at compounded rates of 34% and 27% respectively.

What has driven performance in 2QFY08?
Global IT services lead the way: Wipro recorded a 12% QoQ growth in its topline during 2QFY08. This was driven by 10% QoQ growth in global IT services and products. The volumes have gone up by 8% QoQ and pricing has contributed to 1.9% in case of onsite and 1.6% in case of offshore to the revenues. The company renegotiated the contracts in 2QFY08 at price hikes of 2% to 5% while the newer ones at 3% to 5%. In 2QFY08, acquisitions have contributed Rs 254 m to revenues. The company has consolidated Infocrossing’s revenues with effect from 20th September 2007 and Infocrossing has contributed to US$ 6.4 m in 2QFY08.

Wipro’s organic revenues have grown by 9% sequentially in Global IT services segment, which comprised of 9% QoQ growth in IT services, and 10% QoQ growth in BPO. The revenues from fixed price contracts have gone up by 2% on QoQ basis and offshore contribution to revenue have gone up by 1%.

Segment wise breakup
Rs m 1QFY08 % of total 2QFY08 % of total % change
Global IT services 29,499 69.7% 32,490 67.5% 10.1%
IT Services 26,984   29,452   9.1%
Acquisitions -   254    
BPO Services 2,515   2,784   10.7%
India & AsiaPac 7,501 17.7% 9,312 19.4% 24.1%
CC&L 2,350 5.6% 3,726 7.7% 58.6%
Others 2,954 7.0% 2,587 5.4% -12.4%

In terms of geographies, Japan recorded 26% QoQ growth while Europe revenues went up by 15% QoQ although the US continues to be the most dominant revenue contributor (63% of revenues). In terms of service offerings, testing services have grown by 13% QoQ while consulting revenues have gone up by 21% QoQ. In terms of business verticals, financials services have grown by 11% QoQ and TMTS verticals have recorded 12% QoQ growth.

The company’s consumer care division is also shaping up well after the acquisition of Unza. This division has grown revenues at 84% YoY (including Unza) and 25% YoY (excluding Unza).

Costs synergies aid margin expansion: Wipro managed to expands its operating margins by 0.6% QoQ mainly due to growth in volumes and pricing and better utilisation. While the company affected wages hikes during the quarter, which impacted operating margins by 2%, the employee costs as percentage of sales have come down from 43% in 1QFY08 to 41% in 2QFY08. The operating margin of the BPO segment also improved marginally and now stands at 22.5%. While the salary hikes for BPO employees are due in 3QFY08, as per the management, operating margins of the segment are likely to get impacted by 2% due to these hikes. Operating margins also improved in the consumer care division after the Unza acquisition.

Operating margins expansion aids bottomline: Wipro’s bottomline expanded by 14% QoQ aided by lower taxes and depreciation. While the taxes increased by just 4% QoQ, the effective tax rate came down. Stable depreciation charges also aided the bottomline. While depreciation rose by 6% QoQ, as a percentage of gross fixed assets, it reduced by 0.5% in 2QFY08.

What to expect?
At the current price of 496, the stock is trading at a multiple of 12.7 times our estimated FY10 earnings. While the results have been far more superior when compared to its peers, it remains to be seen whether Wipro will be able to hold on to its performance. The management has given a strong guidance for 3QFY08 despite the fact that there are fewer working days owing to holidays across US and Europe. We remain positive on the stock from a long-term perspective.

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