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Wipro Limited: A well managed company - Outside View by Luke Verghese
 
 
Wipro Limited: A well managed company

A company on a roll if there is one, and with abundant riches to boot, it knoweth not on where to invest its resources profitably

A voluminous report

It is a voluminous annual report and accounts alright- some 230 pages - but in keeping with the size of the company. The standalone company generated total revenues of Rs 345 bn during the latest accounting year while the consolidated results show total revenues of Rs 389 bn. There are other interesting asides of the company in the annual report. Between 1991 and 2013 Wipro engineered 15 mergers into the company and one demerger. The software division makes do with 98 office locations within India and without. The manufacturing locations are situate in three facilities in India. Many of its FMCG manufacturing divisions have also been spun off in the interim, as it did not complement the main operations of the company. Of the software facilities, 58 offices are located offshore in countries spanning the globe. It also has a load of siblings and/or step down siblings- there are 65 of them from my understanding of the big picture -- of which only five are located in India and the rest are scattered across the globe. It is a complex operation - so much so that company officials themselves are not very clear of the present names of all the group companies --one schedule gives the name of one of its principal siblings as Wipro Inc while another schedule says this company is now called Wipro LLC. (The largest investment in a sibling is in Wipro Inc at a book value of Rs 19.9 bn, followed by the tax haven based Wipro Cyprus). Just to add some colour it has a holding company located out of tax haven Mauritius too. Wipro is however an Indian MNC in a manner of speaking.

The outstanding shares are widely held with a shareholding public in 25 separately identifiable cities and a separate classification called 'Others'. There are altogether 2,13,603 shareholders, with Mumbai boasting the largest number at 47,701 members. Considering the stranglehold of the promoters in the outstanding capital, the present pattern of public holding still shows the wide interest in the scrip among the lay public. The share capital consisting entirely of equity shares amounts to Rs 4.9 bn and the Premji family has a more than comfortable stake holding of 78.28%. Considering the current MNC norm of a minimum promoter holding of 75% it is unlikely that the Premji family will ever dilute its stake below 75%. So the scope for further dilution of the promoter stake remains bleak.

The family holding

The family holding is held by four individuals, and eight investment companies, foundations and trusts etc with Azim Premji directly exercising the largest single hold over the voting capital either individually or via closely held companies bearing his name amounting to 57.81%. The largest non family shareholder is LIC with a holding of 2.21%. However a separate schedule listing the names of the top ten shareholders has a slightly different take on the promoter shareholding. In this listing the promoter family gets to control 78.97% of the voting stock. This percentage holding includes a 0.62% stake or 15.36 m shares held by the custodian of enemy property - shares held on behalf of a non resident shareholder, and a 0.54% stake held by Wipro equity reward trust. Do these shares carry any voting rights and if so by whom and who is the beneficiary of the dividends paid on these shares? This is getting to be bizarre.

The company has of course also handsomely rewarded its shareholders over the years AND HOW! Needless to add the principal beneficiary by far of the good tidings are the promoters and their immediate family. The company issued bonus shares 11 times between 1971 and 2010 including two 2:1 bonus issues. There were also two stock splits - meaning reducing the face value of the shares- presently it is Rs 2 per share. If my memory serves me right the face value was first reduced to Rs 5 from Rs 10 and then to Rs 2. If one held 100 shares in 1971 just prior to the first issue of bonus shares and excluding the two stock splits that took place in the interim and if one had held on to the shares all through, then one would be holding 2,49,600 shares in the company today. If one goes back to 1946, when the company was incorporated, the total shareholding gets to be even bigger. (It will be difficult to name another company with such a stellar performance). This is called the power of compounding without even trying. Whoever thought up this concept of issuing bonus shares is nothing short of a Nobel Prize winning genius. Add to this, the dividend bonanza that would have come ones way over the years. For the matter of record, against the present paid up capital of Rs 4.9 bn, the reserves and surplus amounts to a magnanimous Rs 239 bn- implying on paper that the company is ripe for another generous bonus issue offering. (The share price oscillated from a low of Rs 295 in November 2012 to a high of Rs 453 in March 2013 at the NSE. The share price in April 2012 and in March 2013 was almost identical!).

And, true to Azim Premji's stature he maintains a low profile even when collecting his annual tithes from the company. His gross remuneration for the year amounted to Rs 40 m while the top gun T K Kurien raked in Rs 61 m. But, then, Azim's share of dividend inflows is mind boggling.

The revenue accretion

The revenues that accrue are made up of two parts. The sale of products brought in Rs 33.6 bn and the income from the sale of services which fetched it another Rs 298.6 bn. In toto the revenues from operations amounted to Rs 332.3 bn against Rs 317 bn previously. It must be noted that the FMCG operations were yanked off during the year. (Of the total sales, the revenues from exports amounted to Rs 281 bn against Rs 234 bn previously. It may be pertinent to mention here that the total forex spend to realise its revenues amounted to Rs 121 bn against Rs 100 bn previously. In other words IT companies have to spend mega bucks in forex to realise their top line). Then there is other income of Rs 13.2 bn against Rs 12.2 bn previously. Including other income the total revenues amounted to Rs 345.5 bn against Rs 329.1 bn previously- a rise of 5%. The other income consisted of bits and ends including bank deposit interest, interest on mutual funds, profit on purchase/sale of debt securities and such like. (The company purchased and sold debt securities valued totally at Rs 925 bn during the year).The other income accounted for 18.4% of pre-tax profit against 20.7% previously. As one can see it is not a contribution to be sniffed at.

The revenues from the 'sale of products' fell sharply by 47.3% to Rs 33.6 bn--due to the divestment of the FMCG Ops - and currently consist of mini computers, microprocessor based systems networking, storage equipment, servers and software licences. The sale of services which cumulatively rose 17.5% is grouped under three heads- Software services, IT enables services and 'Others.' The vast bulk of the IT services revenues accrue from the sale of Software services. Of the software services that it sold, the sales to group companies amounted to Rs 9.3 bn. On a percentage basis the sales to the group companies are miniscule. It also purchased software services worth Rs 7.9 bn from group companies. The total purchases of traded goods however amounted to Rs 23.5 bn.

The company does not appear to give the division wise profit and loss of the standalone company and hence the profitability of the hardware division is not immediately known. But the hiving off of the FMCG business appears to have done maha good to the bottom-line. The profit before tax rose 21.7% to Rs 72 bn from Rs 59.2 bn previously. The tax provision is still relatively low at Rs 15.4 bn or 21.4% of the book pre-tax profits, against a similar percentage provision previously. (The company however has disputed income tax liabilities to the tune of Rs 32 bn!). The dividend payout for the year amounted to 35.6% of the post tax profits.

The cash flow generation

The company generated a superior cash flow of Rs 61.1 bn from operations during the year against Rs 30 bn previously. (How the cash flow generation from operations of even a top drawer company like WIPRO can change so dramatically at the drop of a hat!) This dramatic change in the cash flow generation was primarily due to two unpredictable factors. On the one hand there was the considerably less than proportionate increase in 'trade receivables and unbilled revenues', and on the other was the sharp increase in the reversal of 'liabilities and provisions'. Now the point is that both these occurrences are undecipherable in the course of a business year and there may not be an encore in the current accounting year. On the contrary there was even a small reversal in fortunes on the cash flow generation front.

With so much surplus cash on hand and with only a farthing to invest in fixed assets - Rs 6.4 bn against Rs 7.7 bn previously- the company was obviously hard put on where to invest the surplus dough. (But the company does however possess a sizeable gross block at year end - Rs 79.5 bn against Rs 83 bn previously. How much of this amount pertains to the manufacturing side of the big picture is not known). But the paradox of its cash riches is that it appears to have a bizarre policy as regards money management. At year end the company had borrowings to the tune of Rs 60.8 bn against Rs 52.8 bn previously. The borrowings appear to emanate from banks - who it would appear would only be too happy to lend to a bulge bracket client like Wipro. Why exactly the company wants to borrow money on such a mammoth scale beats me- but apparently there is a method in the madness- otherwise the venerable chairman on the board would have raised a red flag- what? The fact is that it has a surfeit of cash which is socked away in various nooks and crannies. At year end it had cash and bank balances of Rs 78 bn against Rs 62.3 bn previously. It had another Rs 60.4 bn socked away in current investments or readily encashable securities against Rs 40.4 bn previously. It has another Rs 2.5 bn given as advances to group companies while Rs 9.3 bn is dished out in the form of inter-corporate deposits. Yet some moneys have been invested under the definition of 'Others'. Not forgetting cash outlays in 'non-current' group company investments amounting to Rs 48.5 bn against Rs 63 bn previously. When you talk Wipro, you talk mega bucks.

The cash flow management

The company paid out interest of Rs 799 m on its borrowings- which is a piffling sum of money. This is a ridiculously low interest payout given the size of its borrowings, and there is obviously some magic mantra at work here. Separately, it paid out Rs 2.7 bn as loss incurred on forex borrowings. On the other hand, and as stated earlier, it earned 'other income' comprising of dividends on mutual fund investments, and profit on purchase/ sale of debt securities, and on interest income from banks and others etc of Rs 13.2 bn against Rs 12.3 bn previously. But it is unfortunate that the sizeable investment in the non-current investments portfolio does not earn the company a dime as dividends. But earning any cash returns was not the primary objective of investing in such group companies.

The company is a finely managed ship with the trade receivables of Rs 60.4 bn which are somewhat higher than the trade payables of Rs 49.2 bn. The current assets at year end --barring the cash and bank balances, and short term investments --are lower than the current liabilities. The financials of its many splendored siblings is another 'delight' to read.

It has published the brief financials of 64 siblings of various hues. Barring three of the entities they are all 100% owned by the parent. Of the three which are not, two are close to the 100% mark. Only a handful of them fit into the definition of India based. Of the listing, some 19 companies did not register any revenues. So who is to question anyways? At the top of the heap in terms of paid up capital- Rs 19.9 bn-- is Wipro LLC. In case you did not know, this worthy has negative reserves of Rs 12.8 bn and had total assets of Rs 30 bn. It generated revenues of Rs 6.5 bn but posted a pre-tax loss of Rs 794 m. And, after tax provision of Rs 132 m, it landed with a post tax loss of Rs 925 m. The America based operations appears to be in a whole lot of trouble. It would appear from the figures that off-shoring is an infinitely cheaper option than onsite work when selling software to North American clientele.

The siblings

But the company with the 'mostest' is the India based Wipro Technology Services Ltd. In all probability, and despite the odd naming, this company would appear to be the investment arm of the siblings given the very delectable figures on display. It has a paid up capital of Rs 393 m, reserves and surplus of Rs 7.1 bn, total assets of Rs 8.4 bn, and an investment portfolio of Rs 7 bn. It generated revenues of Rs 2.9 bn and posted a pre-tax profit of Rs 1.4 bn. Its ability to generate revenues of such a magnitude on its portfolio of investments must surely rank as a hallmark. But the company registering the largest revenues by far is Infocrossing Inc a US based offshoot. On zilch paid up capital, and with reserves of Rs 7.4 bn, it toted up revenues of Rs 15.5 bn and a pre-tax profit of Rs 1.2 bn. This entity is closely followed by Wipro Arabia with a paid up capital of Rs 358 m and reserves of Rs 3.4 bn. It generated revenues of Rs 10.3 bn and posted a pre-tax profit of Rs 955 m. Another firangi sibling on the go is the UK offshoot which on a miniscule capital base of Rs 51 m generated revenues of Rs 5 bn and reported a pre-tax of Rs 135 m. There are several other rupees one billion plus revenue generating siblings, including the Portuguese offshoot and, Wipro Retail UK Ltd.

It is a mixed bunch of entities that appear to operate as standalone organisations. And since there is no nudging from the parent the siblings do not have to pay any dividends to the parent either. This as one can see is dismissible change for the management.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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