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Wipro: Facing margin pressure - Views on News from Equitymaster
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Wipro: Facing margin pressure
Oct 22, 2008

Performance summary
  • Topline grows by 8% QoQ during 2QFY09, led by growth in the IT services segment. Growth during 1HFY09 stands at 39% YoY.

  • Operating margins contract by 1% QoQ on account of higher employee and selling costs.

  • Bottomline expands by 8% QoQ, aided by higher other income.

  • Adds 28 new clients in the IT services business during the quarter.

  • Employee strength stands at 97,500 at the end of September 2008.



(Rs m) 1QFY09 2QFY09 Change 1HFY08 1HFY09 Change
Net Sales 60,365 65,196 8.0% 89,881 125,006 39.1%
Expenditure 48,009 52,478 9.3% 71,639 100,488 40.3%
Operating profit (EBDIT) 12,356 12,718 2.9% 18,242 24,518 34.4%
Operating profit margin (%) 20.5% 19.5% 20.3% 19.6%
Other income 506 1,451 186.8% 1,987 2,511 26.4%
Interest 775 1,151 48.5% 461 1,926 317.8%
Depreciation 1,578 1,661 5.3% 2,421 3,239 33.8%
Profit before tax 10,509 11,357 8.1% 17,347 21,864 26.0%
Tax 1,526 1,659 8.7% 2,050 3,185 55.4%
Minority interest (12) (22) 3 (34)
Equity in earnings of affiliates 107 106 -0.9% 193 213 10.4%
Profit after tax/(loss) 9,078 9,782 7.8% 15,493 18,858 21.7%
Net profit margin (%) 15.0% 15.0% 17.2% 15.1%
No. of shares (m) 1,457.1 1,463.1
Diluted earnings per share (Rs)* 24.7
P/E ratio (x)* 11.5
* On a trailing 12-months basis

What has driven performance in 2QFY09?
  • The 8% QoQ growth in Wipro’s topline during 2QFY09 was largely led by its IT services (contributes 73% of total revenue) and product divisions, which grew by 8% and 34% QoQ respectively. The fastest growth was recorded in the product segment because of growth in testing and IP related products.

    Segmental performance analysis

    Revenues (Rs m) 1QFY09 2QFY09 Change
    IT Services 44,045 47,500 7.8%
    PBIT Margins 20.9% 21.0%  
    IT products 7,463 10,023 34.3%
    PBIT Margins 3.3% 4.3%  
    Consumer care &Lighting 5,127 5,269 2.8%
    PBIT Margins 11.9% 12.2%  
    Others 3,286 2,470  
    Elimnations (254) (189)  
    Total 59,667 65,073 9%
    PBIT 1QFY09 2QFY09 Change
    IT Services 9186 9959 8.4%
    IT products 249 429 72.3%
    Consumer care &Lighting 609 643 5.6%
    Others 180 25 -86.1%
    Total  10224 11056 8.1%

  • Wipro has also witnessed rapid growth in business from the domestic market, with the same growing by 22% QoQ during the quarter. The company has won a 5 year multi-million dollar deal for centre upgrade and managed services contract from a leading telecom services provider in India. The company has also won a major contact from Vijaya Bank. Wipro has witnessed 7% QoQ growth in revenues from the US and 1% growth in revenues from Europe. In the EMEA (Europe Middle East and Africa) region Wipro has entered into a large multi-million dollar deal with one of the largest financial services group which gives revenue visibility. The management has also indicated that it is witnessing changing approach towards outsourcing in some of the conservative European countries. These countries are embracing outsourcing and are expected to be major growth driver going forward.

    Geographical performance

    1QFY09 2QFY09 Change
    India 12,558 15,354 22.3%
    US 26,188 28,112 7.3%
    Europe 14,473 14,638 1.1%
    Rest of the world 6,448 6,969 8.1%
    Total  59,667 65,073 9.1%

  • On the manpower front, Wipro added 1,877 employees during 2QFY09. With this, the employee base increased to 97, 550 at the end of September 2008. Wipro added 910 employees in the IT service and 967 employees in the BPO division. The company is planning to rationalise its hiring going forward, as it is planning to focus on nonlinear growth.

  • Wipro recorded a contraction of 1% QoQ in its operating margins during 2QFY09. The margins were affected chiefly on account of lower volume because of fewer working days in this quarter. Further wage hike has also dented margins. However, Wipro managed to offset the pressure on profitability on the back of 2.4% QoQ increase in utilisation and rupee’s depreciation against the US dollar.

  • Wipro recorded 8% QoQ growth in net profits during 2QFY09. This was mainly on account of higher other income which the company generated out of its investments.

What to expect?
At the current price of Rs 285, the stock is trading at a multiple of 9.4 times our estimated FY11 earnings. The management, like its peers, has indicated caution amidst the ongoing financial and economic crisis in the US and Europe. The company expects future growth to come for differentiated service lines like testing, technology infrastructure and BPO. While Wipro looks attractive on a valuation basis, we believe there are better opportunities that investors have in the Indian IT space.

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