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Wipro: Managing the future - Views on News from Equitymaster
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  • Nov 25, 2000

    Wipro: Managing the future

    A survey in May 1999 by the Forbes magazine reported an Indian, Azim H Premji, to be the fourth richest man in the world. The Indian has come a long way, and thanks to him, India too has come into the reckoning. This is another of those exemplary success stories, which is not based on making the most of a sudden prospect but gradually and very sincerely working towards a vision. And Wipro owes a lot of its success to Azim Premji’s vision.

    No doubt that there was a huge market waiting (for software) to be captured and that some companies capitalised on this opportunity by providing services at a low cost. Wipro was one of these initially, but what differentiates it above the rest is that Wipro has always had an eye on the future (technology). Over the years, as Wipro was growing, it was made to evolve into a technology company not just another service company.

    Today 49 percent of the revenues (of its software services) come from its global research & development division. The clients for this division are organisations that invent the future. The demand for as much data in even lesser time has been and will be a key focus area for technology organisations in the near future. We have high-end technologies in networking and data communication but still they have to be made popular and commercially viable. Lucent Technologies estimates the communications software industry to grow from Rs 975 bn to Rs 2,280 bn by 2003 at a compounded annual growth rate of 23 percent.

    Wipro’s enterprise solutions division has created a niche market for itself by providing end-to-end solutions. This group is involved in e-enabling organisations where the software market is now focused. Today organisations are looking for solutions not services, which require a variety of skill sets and very few companies, like Wipro, have them all.

    Wipro is set to enter the ASP (Application Service Provider) market in a very big way in the near future. It already provides e-infrastructure to organizations locally and remotely through it’s Global Support Services group. It has a lot of experience in this area and this will help Wipro to successfully exploit the ASP market. This for one is going to be a low margin high volume game. Initially, it may be a loss-making proposition but e-infrastructure is going to be essential for every business. Consequently, the ASP industry is likely to go the utilities way.

    At every point in its growth, an area where Wipro stood out from the rest was its quality focus. It was the first company to achieve SEI-CMM level 5 Certification. Today, everybody is running to get a CMM (capability maturity model) certification, what differentiates Wipro is that it is the first to do so. It sets the standards.

    But when it comes to bottom lines, Wipro is certainly not a star performer with net profit margins in the region of 12 percent in fiscal year ‘00. This is because of its diversified portfolio. Apart from software services, Wipro’s portfolio consists of hardware, toilet soaps, pneumatics, Vanaspati, hydrogenated oils and lighting products. These divisions do not generate operating margins like the software division.

    The outlook on Wipro is very positive as its growth is going to be fuelled by acquisitions, for which Wipro has raised an estimated Rs 5,268 m (US $ 113.7 m) through its American Depository Receipt issue. This would enhance the skill set and deliverability of the company. The areas like networking, communications, business intelligence and ASP would add to the pace of growth. E-business too is going to be a major revenue stream for Wipro and the brand name will provide the winning edge. But the most interesting area where Wipro is developing capabilities is in the area of business intelligence. An area that is going to be a key focus in the times to come.

    The only concern is that Wipro has lost a few key employees. These people had played a key role in molding Wipro into the infotech major its is over the last 15 years. Few employees have set up organisations that offer similar services. The wealth of a software company is its people. The challenge today is not generating revenues but defending its wealth and creating more.

    Division Revenue %
    of total
    Margins %
    PAT from division
    as a % of Total
    Global IT Services 56 33 88
    Indian IT Services and Prouducts 29 6 8
    Consumer Care and Lighting 13 13 7

    Wipro’s valuation at a price to earnings multiple of 94x (which is the highest for the software industry) is quite high taking into account the fact that it does not have topline growth similar to the best in the industry.

    The primary reason for this high valuation would be the short supply of Wipro’s shares. Since the management holds (Mr. Premji holding around 80 percent) a large portion of the stock.

    Particulars Wipro Infosys Hughes Software
    Market Price 2,554 7,651 1,003
    P/E(x) 94.9 82.1 74

    What is driving these valuations? Is it the growth rates? More than that we presume it to be the faith in the quality of management and its ability to deliver. How much the management can live up to these great expectations would be something, which will be very interesting to watch. As the biggest threat is not from competition but from the employees (assets) who may become competition.



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