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Wipro: Disappointing operating performance - Views on News from Equitymaster

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Wipro: Disappointing operating performance
Oct 30, 2014

Wipro has announced its results for the second quarter of 2014-2015. The company has reported a 5.1% QoQ increase in sales and a 0.9% QoQ fall in net profits. Here is our analysis of the results.

Performance summary
  • Consolidated net sales increased by 5.1% QoQ during the quarter. The revenues increased 1.8% QoQ in US dollar terms.
  • Operating margin fell by 2% QoQ to 21.7% during the quarter as compared to 23.7% seen during 1QFY15. On an absolute basis, the operating profit fell by 3.5% QoQ in the quarter.
  • Net profits declined by 0.9% QoQ. The sequential fall in net profits was largely attributable to the operating performance.

Consolidated financial performance
(Rs m) 1QFY15 2QFY15 Change 1HFY14 1HFY15 Change
Gross revenues 112,455 118,160 5.1% 207,239 230,615 11.3%
Expenditure 85,850 92,482 7.7% 161,998 177,873 9.8%
Operating profit 26,605 25,678 -3.5% 45,241 52,742 16.6%
Operating profit margin (%) 23.7% 21.7%   21.8% 22.9%  
Other income 4,239 5,109 20.5% 6,774 9,348 38.0%
Finance expenses 888 989 11.4% 1,151 1,877 63.1%
Depreciation 2,834 2,616 -7.7% 5,117 5,909 15.5%
Profit before tax 27,122 27,182 0.2% 45,747 54,304 18.7%
Tax 5,942 6,199 4.3% 10,005 12,141 21.3%
Profit after tax 21,180 20,983 -0.9% 35,742 42,163 18.0%
Minority interest 148 135 -8.8% 187 283 51.3%
Net profit 21,032 20,848 -0.9% 35,555 41,880 17.8%
Net profit margin (%) 18.7% 17.6%   17.2% 18.2%  
No. of shares (m)         2,467.8  
Diluted earnings per share (Rs)*         34.2  
P/E ratio (x)*         16.4  
* On a trailing 12-months basis

What has driven performance in 2QFY15?
  • In terms of verticals, service lines and geographies Wipro had a fairly decent quarter. Apart from application development and maintenance services, BPO operations and the European geography; the company witnessed broad based growth.

    Business mix
    Revenue breakup for IT services (Rs m) 1QFY15 2QFY15 Change
    Based on geography
    US 56,003 60,262 7.6%
    Europe 33,287 32,848 -1.3%
    India and Middle East 10,233 10,871 6.2%
    Rest of the world 12,932 14,179 9.6%
    Based on service offerings
    Application Development and Maintenance 20,242 19,378 -4.3%
    Global Infrastructure Services 28,451 31,667 11.3%
    Business Application Services 32,275 34,385 6.5%
    Product Engineering 7,872 8,271 5.1%
    Advanced Technologies & Solutions 12,707 13,588 6.9%
    BPO 10,908 10,871 -0.3%
    Based on verticals
    Global Media & Telecom 16,081 16,424 2.1%
    Finance Solutions 30,025 30,722 2.3%
    Manufacturing & Hi-tech 20,467 21,505 5.1%
    Healthcare, Life Sciences & Services 12,145 13,234 9.0%
    Retail, Consumer goods & Transportation 15,744 16,424 4.3%
    Energy and Utilities 17,993 19,851 10.3%

  • At the operating level, the margins took a hit due to the wage hikes given on 1st June. Thus, there was a 2 month sequential impact in 2QFY15.

  • At the net level, the dull operating performance was compensated to an extent by higher other income and lower depreciation. However, the net profit still declined by 0.9% QoQ.
What to expect?
At the current price of Rs 560, the stock is trading at a multiple of 16.4 times its trailing 12 month earnings.

IT services revenue posted a sequential growth of 3% in 2QFY15. The management has guided for 2-4% growth in IT services in 3QFY15. However, this will be excluding the revenues from Atco which the company had signed last quarter.

The management has stated that they are witnessing good deal momentum in the healthcare and consumer industries. However, the energy and financial services industries are expected to witness softness in the coming quarter.

The new digital technologies are clearly becoming a driver for growth. The company won 8 deals in this space in the quarter. Even though the contract sizes are small in this space currently, they are expected to scale up in the future. Wipro is already executing 3 large deals of this kind.

The management stated that they are witnessing discretionary spending coming back in the US but not in Europe. However, growth in the Middle-East and the Asia Pacific regions remains robust.

Wipro has unveiled plans to aggressively implement automation platforms to improve margins. This will involve replacing people with software for performing mundane routine tasks. This will have multiple benefits. It will improve employee productivity, enable the company to better manage its hiring policies and win more fixed price contracts. All these along with the steadily improving utilisation rate bode well for the company's margins in the medium to long term.

We met the management of Wipro recently and are making further revisions to our financial estimates for the company. We will update investors regarding our view on the stock either before or latest by the time of the next quarter's results.

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