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Wipro: Growth momentum back on track - Views on News from Equitymaster
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Wipro: Growth momentum back on track
Oct 31, 2011

Wipro has announced the second quarter results of financial year 2011-2012 (2QFY12). The company has reported a 6.1% QoQ growth in sales but a 2.5% QoQ decline in net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales grew by 6.1% QoQ during the quarter. This was largely driven by a 6.6% QoQ growth in Information Technology (IT) services business, on the back of a healthy volume growth of nearly 6.0% QoQ during the quarter. For the half year ended September 2011 (1HFY12), sales grew by 17.0% YoY (year-on-year).
  • operating margins declined by 1.2% QoQ due to higher cost of revenues which offset the positive effects of margin decline in selling & marketing as well as general and administration expenses (all as percentage of sales). For 1HFY12, margins declined by 2.7% YoY as compared to the same period last year.
  • Net profits declined by 2.5% QoQ. This was on account of lower operating margins, lower other income as well as higher interest charges, which offset the positive effects of higher exchange gains and lower tax expense during the quarter. For 1HFY12, net income increased by 1.2% YoY.
  • Employee strength of the IT services business stood at 131,730 at the end of September 2011. IT services added 5,240 (net) employees during 2QFY12. Attrition declined to 21.1% as compared to 22.6% for the previous quarter (June 2011).
  • IT services segment adds 44 new clients during the quarter, thereby taking the total count of active clients to 930.
  • Gross utilization rate was up to 69.3% during the quarter as compared to 69.7% seen in the previous quarter (1QFY12).
Consolidated financial performance (IFRS)
(Rs m) 1QFY12 2QFY12 Change 1HFY11 1HFY12 Change
Revenues 84,929 90,070 6.1% 149,625 175,000 17.0%
Expenditure 68,350 73,547 7.6% 117,292 141,898 21.0%
operating profit (EBDIT) 16,579 16,523 -0.3% 32,333 33,102 2.4%
operating profit margin (%) 19.5% 18.3%   21.6% 18.9%  
Finance and other income 2,192 2,113 -3.6% 2,773 4,305 55.2%
Interest expense 760 1,250 64.5% 870 2,010 131.0%
Depreciation 2,338 2,520 7.8% 3,852 4,857 26.1%
Equity in earnings of affiliates 110 99 -10.0% 349 208 -40.4%
Exchange difference 711 875 23.1% 45 1,586 3424.4%
Exceptional Items - -   - -  
Profit before tax 16,494 15,840 -4.0% 30,778 32,334 5.1%
Tax 3,096 2,841 -8.2% 4,528 5,937 31.1%
Minority interest 49 (10)   215 39  
Net profit available to equity shareholders 13,349 13,009 -2.5% 26,035 26,358 1.2%
Net profit margin (%) 15.7% 14.4%   17.4% 15.1%  
No. of shares (m)       2452.3 2,457.5  
Diluted earnings per share (Rs)*         21.7  
P/E ratio (x)*         17.0  
* on a trailing 12-months basis

What has driven performance in 2QFY12?
  • Wipro's sales grew by 6.1% QoQ during 2QFY12. This was driven by growth in all the business segments, except for IT products business. The IT services business (76% of total sales) and the consumer care & lighting business (9% of total sales) registered a growth of 6.6% QoQ and 6.1% QoQ. The 'others' business segment (5% of total sales) witnessed a growth of a good growth of 17.2% QoQ during the quarter. However, the IT products business (11% of total sales) declined marginally by 0.5% QoQ during the quarter.
  • Revenue breakup
    Based on businesses
    IT Services 64,046 68,294 6.6%
    IT products 10,058 10,008 -0.5%
    Consumer care &Lighting 7,545 8,002 6.1%
    others 3,959 4,641 17.2%

  • With regards to segment wise performance, growth in Wipro's IT services business was driven by 'Analytics and Information Management' and 'Technology infrastructure services'. These segments witnessed a growth of 10.0% QoQ and 8.6% QoQ respectively during the period. The 'Product Engineering & Mobility' and 'Business application services' segments witnessed an increase of 7.9% QoQ and 7.0% QoQ respectively during the quarter. The key segment of 'Application development and maintenance', which constitutes 24% of IT services' total sales, witnessed a growth of 5.3% QoQ as well during the quarter. The BPo segment witnessed a marginal growth of 0.9% QoQ during the quarter.

    IT services revenue breakup
    Based on geography
    (Rs m) 1QFY12 2QFY12 Change
    US 33,944 35,308 4.0%
    Europe 18,317 19,669 7.4%
    Japan 705 888 26.0%
    India and Middle East 5,764 6,351 10.2%
    Rest of the world 5,316 6,078 14.3%
    Based on service offerings
    Application development and maintenance 15,307 16,117 5.3%
    Technology infrastructure services 13,898 15,093 8.6%
    Business application services 19,470 20,830 7.0%
    Product Engineering & Mobility 5,316 5,737 7.9%
    Analytics and Information Management 4,099 4,507 10.0%
    BPo 5,956 6,010 0.9%
    Based on verticals
    Global Media &Telecom 10,760 10,722 -0.3%
    Finance Solutions 17,100 18,508 8.2%
    Manufacturing & Hitech 12,617 12,976 2.8%
    Healthcare, Life Sciences & Services 6,533 6,693 2.5%
    Retail & Transportation 9,607 10,039 4.5%
    Energy and Utilities 7,429 9,356 25.9%

  • In terms of industry verticals, the growth in sales was driven by two verticals 'Energy & Utilities' and 'Finance Solutions' which grew by 25.9% QoQ and 8.2% QoQ respectively during the quarter. other verticals 'Retail & Transportation', 'Manufacturing & Hi-tech' and 'Healthcare, Life Sciences & Services' witnessed a growth of 4.5% QoQ, 2.8% QoQ and 2.5% QoQ during the quarter. However, sales from 'Global Media & Telecom' declined marginally by 0.3% QoQ during the quarter.

  • on a geographic basis, the revival in the business from Europe continued during the quarter. Sales from the region grew by 7.4% QoQ during the period. Revenues from 'Japan', 'Rest of the world' and 'India and Middle East' saw a growth of 26.0% QoQ, 14.3% QoQ and 10.2% QoQ respectively during the quarter. Revenues from Wipro's major market i.e., the US (52% of sales) market witnessed a growth of 4.0% QoQ in sales during the quarter.

  • Wipro's operating margins declined by 1.2% QoQ due to higher cost of revenues which offset the positive effects of margin decline in selling & marketing as well as general and administration expenses (all as percentage of sales).

  • Wipro's net profits declined by 2.5% QoQ. This was on account of lower operating margins, lower other income as well as higher interest charges, which offset the positive effects of higher exchange gains and lower tax expense during the quarter. The tax rates were also lower at 17.9% as compared to 18.8% seen during the previous quarter (1QFY12).

What to expect?
At the current price of Rs 368, the stock is trading at a multiple of 11.5 times our estimated FY14 earnings.

At the beginning of the year, the management had carried out several organization changes to make Wipro simpler, agile and more customer centric. The benefits of these have started to flow in as seen during the previous quarter. During 2QFY12, the company witnessed a good growth in volumes. The management expects demand environment to remain volatile in the near term. However, they stated that this would not impact the growth trajectory of the company in the coming quarters.

The company has registered a decline in both onsite as well as the offsite realizations during the quarter. However, the management stated that there is no pressure on the pricing front. Going forward, the management expects pricing to remain flat with an upward bias.

The attrition has come down to the level of 21.1% during the quarter. The management stated that it would come down further in the coming quarter on the back of salary increase, progression cycle and better employee engagement across the organization.

The management stated that they would continue to focus on the high momentum industry verticals such as financial services, retail, healthcare and energy & utility. They would continue to work on services such as analytics, mobility to generate the future growth for the company. Considering the revived growth momentum, we maintain our 'Buy' view on the stock of the company.

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