Wipro: IT services on an upswing - Views on News from Equitymaster

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Wipro: IT services on an upswing

Oct 27, 2009

Performance summary
  • Sales grow by 10% QoQ, primarily on account of good performance of the IT services and IT products businesses.
  • Operating margins expand by 0.4% QoQ on account of cost containment measures and improved volumes. Margins for IT services and IT products businesses expand by 1.5% and 0.8% QoQ respectively.
  • Net profits grow by 14% QoQ on the back of improved operating margins and gains from other income and profits from associates.
  • Employee strength of the IT services business stood at 97,891 at the end of September 2009.
  • IT services adds 37 new clients during 2QFY10.

Consolidated financial performance
(Rs m) 1QFY10 2QFY10 Change 1HFY09 1HFY10 Change
Net Sales 62,891 69,402 10.4% 125,006 132,293 5.8%
Expenditure 49,498 54,358 9.8% 100,488 103,856 3.4%
Operating profit (EBDIT) 13,393 15,044 12.3% 24,518 28,437 16.0%
Operating profit margin (%) 21.3% 21.7%   19.6% 21.5%  
Other income 994 1,172 17.9% 2,511 2,166 -13.7%
Interest  606 561 -7.4% 1,926 1,167 -39.4%
Depreciation 1,798 2,016 12.1% 3,239 3,814 17.8%
Profit before tax 11,983 13,639 13.8% 21,864 25,622 17.2%
Tax 1,864 2,085 11.9% 3,185 3,948 24.0%
Minority interest (49) (58)   (34) (107)  
Equity in earnings of affiliates 85 121 42.4% 213 206 -3.3%
Profit after tax/(loss) 10,155 11,617 14.4% 18,858 21,773 15.5%
Net profit margin (%) 16.1% 16.7%   15.1% 16.5%  
No. of shares (m) 1,466.0 1,466.1   1,463.3 1,466.1  
Diluted earnings per share (Rs)   27.9     28.6  
P/E ratio (x)   22.0     21.4  

What has driven performance in 2QFY10?
  • Wipro’s topline grew by 10% QoQ during 2QFY10. This was on account of some stability registered in the IT services and products businesses. The IT services business, which contributed 72% to the company’s total sales, grew by 3.5% QoQ. The IT product business (17% of sales) saw a growth of 56% QoQ.

    Further, Wipro’s consumer care and lighting business (8% of sales) grew by around 7% QoQ during 2QFY10. During the quarter, the company inked a number of large strategic deals across industry verticals and geographies. This includes a 5-year IT outsourcing contract with BP, a 10-year outsourcing contract with Delhi International Airport Ltd. (DIAL), and a number of deals in telecom, healthcare, and beverages sectors. It added 37 new clients during the quarter.

    Revenue breakup (In Rs m)
    (Rs m) 1QFY10 2QFY10 Change
    On basis of geography      
    India 13,207 17,351 31.4%
    US 27,043 30,537 12.9%
    Europe 12,578 13,880 10.4%
    Rest of the world 10,063 7,634 -24.1%
    On basis of businesses      
    IT Services 48,249 49,957 3.5%
    IT products 7,602 11,834 55.7%
    Consumer care &Lighting 5,463 5,866 7.4%
    Others 1,477 1,584 7.2%

  • In terms of geographies, revenues from Wipro’s major market i.e., the US (44% of the topline) grew by a decent 13% QoQ. India (25% of sales) grew robustly by 31%. Sales from the European markets (20% of total sales) grew by 10% QoQ. Sales from rest of the world (11% of total sales) saw a decline of 24% QoQ.

  • Wipro’s operating margins expanded by 0.4% QoQ during 2QFY10. This can be credited to better utilisation levels, aided by a push towards offshoring. Improvement in margins was seen across all the business segments.

  • Wipro reported a strong growth of 14% QoQ in net profits during 2QFY10. This was mainly aided by better operating margins and increased gains from other income and share of profits from associates.

What to expect?
At the current price of Rs 613, the stock is trading at a multiple of 16.1 times our estimated FY12 earnings. The company’s performance indicates an improvement in demand environment with an increased stability in volumes and pricing. The management expects revenues from IT services business to be in the range of US$ 1,098 m to US$ 1,113 m in 3QFY10, an average increase of around 3.5% QoQ. It is confident of achieving its guidance projections based on strong deals pipeline in the segments of BPO, product engineering, package implementation and IT transformation. The management expects product business to show robust performance on back of traction in Indian and Middle-East regions. IT services business is also on an upward trajectory as client sentiments improve even in verticals like technology, manufacturing and telecom equipments which were badly hit till last quarter.

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