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Wipro: Growth picks up
Oct 22, 2013

Wipro Ltd has announced its results for the second quarter of the financial year 2013-2014 (2QFY14). The company has reported a 12.9% QoQ growth in sales and a 19% QoQ growth in net profits. Here is our analysis of the results.

Performance summary
  • Consolidated net sales grew by 12.9% QoQ during the quarter.
  • Operating (EBITDA) margin improved by 2.1% YoY to 22.8% during the quarter as compared to 20.7% seen during 1QFY14. On an absolute basis, operating profits grew by 23.9% QoQ in the quarter.
  • Net profits grew by 19% QoQ. The growth in net profits was a result of good performance at the operational level.
  • Employee strength fell marginally and stood at 147,216 at the end of September 2013.
  • Gross employee utilization rate was higher at 66.1% during the quarter as compared to 64.7% seen in the previous quarter (1QFY14). Net employee utilization (excluding trainees) improved to 74.3% from 73.3% seen during 1QFY14.


Consolidated financial performance
(Rs m) 1QFY14 2QFY14 Change 1HFY13 1HFY14 Change
Gross revenues 97,332 109,907 12.9% 184,827 207,239 12.1%
Expenditure 77,129 84,869 10.0% 145,021 161,998 11.7%
Operating profit (EBITDA) 20,203 25,038 23.9% 39,806 45,241 13.7%
Operating profit margin (%) 20.8% 22.8%   21.5% 21.8%  
Finance and other income 3,362 3,412 1.5% 5,343 6,774 26.8%
Finance expenses 495 656 32.5% 1,826 1,151 -37.0%
Depreciation 2,501 2,616 4.6% 5,003 5,117 2.3%
Exchange difference       1,867    
Profit before tax 20,569 25,178 22.4% 40,187 45,747 13.8%
Tax 4,251 5,754 35.4% 8,467 10,005 18.2%
Profit for the period from continuing operations 16,318 19,424 19.0% 31,720 35,742 12.7%
Profit after tax for the period from discontinuing operations       2,215    
Profit for the period 16,318 19,424 19.0% 33,935 35,742 5.3%
Minority interest 84 103 22.6% 161 187 16.1%
Net profit available to equity shareholders 16,234 19,321 19.0% 33,774 35,555 5.3%
Net profit margin (%) 16.7% 17.6%   18.3% 17.2%  
No. of shares (m)         2,465.1  
Diluted earnings per share (Rs)*         27.6  
P/E ratio (x)*         18.6  

What has driven the performance in 2QFY14?
  • In 2QFY14 Wipro has delivered revenue growth of 12.9% QoQ. However in the growth in constant currency terms was on the lower side at 3.2% QoQ.

  • The IT Services and IT product segments witnessed growth of 12.7% QoQ and 14.8% QoQ respectively.

    Revenue breakup (In Rs m)
    (In Rs m) 1QFY14 2QFY14 Change
    Based on businesses
    IT Services 89,363 100,679 12.7%
    IT products 8,166 9,374 14.8%
    Others (183) (133)  

  • In terms of service offerings, Business application services and product engineering services witnessed the highest growth rates of 14.8% and 14.2% QoQ. These were followed by global Infrastructure services and Analytics and Information Management, which grew by 12.7% QoQ and 11.2% QoQ respectively. Application development and maintenance and BPO witnessed the slowest growth in the quarter of 10.5% QoQ and 10.1% QoQ respectively.

  • In terms of industry verticals, the highest growth came in from the 'Healthcare and Lifesciences' and 'Media and Telecom' verticals which recorded growth of 16% QoQ and 15% QoQ respectively. These were followed by 'Manufacturing' and 'Finance services' with growth of 12.2% QoQ and 12.1% QoQ respectively. 'Energy & Utilities' and 'Retail & Transportation' verticals grew the slowest in the quarter with growth of 11.7% QoQ and 10.9% QoQ respectively.

    IT services revenue breakup
    (Rs m) 1QFY14 2QFY14 Change
    Based on geography
    US 44,413 50,138 12.9%
    Europe 25,915 29,096 12.3%
    India and Middle East 7,864 8,356 6.3%
    Rest of the world 11,170 13,088 17.2%
    Based on service offerings
    Application development and maintenance 18,498 20,438 10.5%
    Technology infrastructure services 21,626 24,364 12.7%
    Business application services 27,971 32,117 14.8%
    Product Engineering & Mobility 6,702 7,652 14.2%
    Analytics and Information Management 6,702 7,450 11.2%
    BPO 7,864 8,658 10.1%
    Based on verticals
    Global Media & Telecom 12,198 14,022 15.0%
    Finance Solutions 23,692 26,570 12.1%
    Manufacturing & Hi-tech 17,029 19,100 12.2%
    Healthcare, Life Sciences & Services 8,767 10,174 16.0%
    Retail & Transportation 13,449 14,916 10.9%
    Energy and Utilities 14,228 15,897 11.7%

  • The company's operating margins improved to 23.9% from 20.7% in the previous quarter (1QFY14). The operational performance was driven by good revenue growth as well as better control over employee costs and sub-contracting costs.

  • At the bottomline level, the net profits grew by 19% QoQ. This was slower that the growth in the operating profits due to higher finance costs as well as an increase in the effective tax rate during the quarter. Effective tax rate increased from 20.7% in the previous quarter to 22.9% in this quarter.
What to expect?
At the current price of Rs 514.9, the stock is trading at a multiple of 18.6 times its trailing 12 month earnings.

Wipro had a decent quarter in 2QFY14 driven by a modest 3.2% QoQ growth in revenue in constant currency terms. The management stated that they were looking to get back to industry level growth rate of about 5% QoQ in constant currency terms by the end of the financial year. However they said that they would still have to work on attaining growth at that level.

The impact of the wage hike given by Wipro on 1st June, 2013 was not felt at the operating level due to the rupee depreciation and better operational efficiencies.

The management sounded confident that the broad based growth seen in this quarter could be sustained but cautioned that it would not be possible for all verticals to grow at a fast pace in every quarter.

The company added 45 new clients in the quarter but the management stated that their focus would be to win large deals and not just increase the number of clients.

The management has stated that the improvement in the operating margins could only be sustained if the growth in revenues would pick up. This is because further improvements in operational efficiency would not be able to contribute a lot more to an improvement in operating margins.

While the long term prospects of Wipro are good, we believe that most of the upside is already factored in at the current valuations. Therefore we maintain our 'Sell' view on the stock.

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