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Wipro: Currency impact drags profits

Oct 22, 2010

Wipro has announced its 2QFY11 results. The company has reported a 8% QoQ growth in sales but a 3% QoQ decline in net income. Here is our analysis of the results.

Performance summary
  • Sales grow 8.1% QoQ during the quarter driven by a healthy growth across all its segments.
  • Operating margins decline by 0.9% QoQ due to employee promotions, grant of stock options and impact of foreign exchange movements.
  • Net profits declined by 2.5% QoQ due to lower operating margins as well as due to higher interest and depreciation related expenses. Net income was also negatively impacted by exchange loss as compared to exchange gain during the last quarter.
  • Employee strength of the IT services business stood at 115,900 at the end of September 2010.
  • IT services added 2,975 (net) employees during 2QFY11. Attrition rose to 19.4% as compared to 15.8% for the last quarter (June 2010).
  • IT services segment adds 29 new clients during the quarter, thereby taking the total count of active clients to 890.

Consolidated financial performance
(Rs m) 1QFY11 2QFY11 Change 1HFY10 1HFY11 Change
Net Sales 71,906 77,719 8.1% 132,805 149,625 12.7%
Expenditure 55,988 61,204 9.3% 103,175 117,184 13.6%
Operating profit (EBDIT) 15,918 16,515 3.8% 29,630 32,441 9.5%
Operating profit margin (%) 22.1% 21.2%   22.3% 21.7%  
Other income 1,351 1,422 5.3% 2,167 2,773 28.0%
Interest  403 467 15.9% 1,131 870  
Depreciation 1,884 2,068 9.8% 3,852 3,960 2.8%
Exchange difference 458 (414)   (1,166) 45  
Profit before tax 15,440 14,988 -2.9% 25,648 30,429 18.6%
Tax 2,345 2,183 -6.9% 3,957 4,528 14.4%
Minority interest (67) (148)   (107) (215)  
Equity in earnings of affiliates 157 192 22.3% 226 349 54.4%
Profit after tax/(loss) 13,185 12,849 -2.5% 21,810 26,035 19.4%
Net profit margin (%) 18.3% 16.5%   16.4% 17.4%  
No. of shares (m)       1,466.1 2,452.3  
Diluted earnings per share (Rs)*         20.5  
P/E ratio (x)*         21.9  
* On a trailing 12-months basis

What has driven performance in 2QFy11?
  • Wipro’s sales grew by around 8.1% QoQ during 2QFY11. This was driven by a 5% QoQ growth in the IT services business (74% of total sales) and a 29% QoQ growth in the IT products (14% of total sales) business. The consumer care and lighting business (9% of total sales) grew by 4% QoQ during the quarter.

  • IT services saw a growth across all segments including the BPO segment. Application development and maintenance, which constitutes 39% of total sales, grew by 3% QoQ during the quarter. The product engineering segment (5% of sales) witnessed a robust growth of 16% QoQ during the period.

  • All the verticals saw a growth across the board. It was led by ‘Retail & Transportation’ and the ‘Healthcare’ verticals that grew by 9% QoQ and 8% QoQ respectively. The Healthcare and Energy & Utilities segments witnessed declines of 3% QoQ each.

    IT services revenue breakup
    IT services revenue breakup (In Rs m) 1QFY11 2QFY11 Change
    Based on service offerings      
    Application development and maintenance 21,561 22,299 3.4%
    Technology infrastructure services 11,605 12,184 5.0%
    Package Implementation 7,425 7,816 5.3%
    Testing services 6,270 6,552 4.5%
    BPO 5,555 5,632 1.4%
    Product Engineering 2,585 2,988 15.6%
    Based on verticals      
    Technology, Media and Telecom 14,136 14,368 1.6%
    Financial Services 14,796 15,460 4.5%
    Manufacturing 8,305 8,506 2.4%
    Healthcare services 4,675 5,057 8.2%
    Retail and Transportation 8,195 8,908 8.7%
    Energy and Utilities 4,895 5,172 5.7%

  • In terms of geographies, revenues from Wipro’s major market for IT services i.e., the US (56% of sales) saw a growth of nearly 5% QoQ during the quarter. During the quarter, there was a revival in the business from Europe. Sales from the region grew by 13% QoQ during the period. India and Middle East (9%) grew by 7% QoQ during the quarter. Sales from Japan (2%) and the rest of the world (7%) increased by 8% QoQ and 14% QoQ respectively.

    Revenue breakup (In Rs m)
    (Rs m) 1QFY11 2QFY11 Change
    Based on geography      
    US 41,202 43,445 5.4%
    Europe 18,264 20,596 12.8%
    Japan 1,079 1,166 8.1%
    India and Middle East 6,472 6,917 6.9%
    Rest of the world 4,890 5,596 14.4%
    Based on businesses      
    IT Services 55,002 57,471 4.5%
    IT products 8,320 10,693 28.5%
    Consumer care &Lighting 6,414 6,651 3.7%
    Others 2,321 2,490 7.3%

  • Wipro’s operating margins declined by 0.9% QoQ during the quarter. This was mainly due to the impact of employee promotions and the grant of stock options during the quarter.

  • Wipro’s net profit declined by 2.5% QoQ during the quarter. due to lower operating margins as well as due to higher interest and depreciation related expenses. Net income was also negatively impacted by exchange loss as compared to exchange gain during the last quarter.

What to expect?
At the current price of Rs 448, the stock is trading at a multiple of 15.5 times our estimated FY13 earnings. The management is seeing traction in deals. Business from the US continues to see higher traction especially in the healthcare, retail, banking and energy & utilities sectors. However, demand from the technology and the telecom sectors is lagging behind. company has signed some major deals and will see its benefits in quarters to come as billed hours for these start to pick up.

The management hopes to improve margins to industry levels through better utilization rates. In terms of pricing, the management expects pricing to remain stable and start to increase by next year. Currently they have witnessed some pressure on constant currency pricing on the onshore side. This was mainly due to the closures of some large fixed price deals. Wipro’s focus on non-linear revenue growth along with more value-added services has also resulted in better realization.

At current prices we feel that most of the growth is already priced in. We maintain a cautious view on the stock. (Research Pro subscribers please click here to read our detailed review).

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