The very erudite CFO, Mr. Senapaty, in his 'autographed' debriefing to the shareholders, says that Wipro is the pioneer in India in publishing consolidated accounts, and that in the segment reporting front, its disclosures exceed the best global practices. For sure, the company gives one hell of a lot of info - the bulky and nattily done up annual report runs into a cool 208 pages or so. But the information spread is still 'iffy' at best. For example the directors do not explain why a company with cash balances and free float investments aggregating to Rs 100 bn at end FY10, would also choose to have debt totaling Rs 55 bn at year end. It even made do with juggling its loan portfolio during the year - repaying Rs 53 bn and resorting to fresh borrowings of Rs 59 bn. And boy oh boy, these guys are so clever that they have even managed to bum off an interest free loan of Rs 37 m from state governments! This amount is a part of the overall debt. Talk about state governments being parsimonious!
What is quite clear is that the company suffers from an embarrassment of riches. So much so, that the management finds it difficult to find safe investment avenues for these cash surpluses. It of course invests merrily in new subsidiaries which it incubates by the dozen, and where it can park some of its accumulated riches. (The reader may be interested to know that Wipro has 80 subsidiaries/step subsidiaries at end FY10. But more on this later). So the company had idle cash of Rs 57 bn, and, a combination of inter-corporate deposits, advances to subsidiaries, and investments in certificates of deposits and mutual funds amounting to another Rs 43 bn. The borrowings obviously come at a price - it paid out Rs 1.1 bn in this respect. It is a secondary matter than that this interest can be set off as a revenue expense. Okay. The company also earned Rs 2.5 bn in interest during the year. Quite evidently, the management knows what it is doing, but it would be in the fitness of things if they shared their magic mantra of functioning the way they do with the not so discerning hoi polloi.
Iffy information spread
What is also baffling is how the company made a smaller tax provision on a higher pretax profit in its stand alone results, when in the consolidated statement it has provided for a higher tax provision on a lower pretax profit. The provision for tax at Rs 7.9 bn in the standalone profit before tax of Rs 56.8 bn works out to 13.9% of pretax profit. In the consolidated results the tax provision of Rs 9.2 bn on a lower consolidated pretax profit of Rs 55.1 bn comes to 16.6% of pre-tax profit. (Pre-tax profits in the consolidated results took a hit of Rs 4.5 bn due to the exclusion of some items of other income that were included in the standalone results). But, such are the ways of the world one opines. It also infers that the subsidiaries have collectively created a dent in its bottom line. Equally interesting is that the group's shareholding population over the last 5 years has gyrated like its share price, taken on a year end to year end basis. Just for starters, the shareholding base dropped to 1.80 lakhs from 2.28 lakhs in the preceding year end. The market capitalization over the 5 years too did a ditto class act.
The overall tax provision statistics is still very much in Wipro's favor. Of the big three (TCS, WIPRO and Infosys) it is Infosys which is forking out the highest tax provision by far, as a percentage of pretax profit. Wipro's tax cushion comes from operations in STPI Parks and in Special Economic Zones which have built in direct tax concessions but come laced with export obligations.
The most fascinating part about the company is the many subsidiaries that dot its landscape -there are 80 in all. Wipro per se has only 19 direct subsidiaries, as well as equity stakes in two affiliates. The other progeny feature in the 'step subsidiary' list. The bulk of its equity stake of Rs 58.5 bn in its direct subsidiaries is held in 3 companies - Wipro Cyprus, Wipro Inc and Wipro technology Services - with Wipro Cyprus alone accounting for more than half of this total equity investment. The latter in turn controls another 16 companies, or step subsidiaries, spread across a wide swath of mother earth. Then there is the portfolio of 21 companies, which also features in the step subsidiary list, and is listed under the 'Unza' brand name. But what is not immediately clear is which company is the holding company of these Unza step subsidiaries. As a matter of fact there are so many subsidiaries to handle, that the accountants forgot to change the name of one of the companies from 3D Networks Pte Ltd to Wipro Networks Pte Ltd!
The company has presented the working results of 79 of its subsidiaries. Of these, 71 are foreign incorporated and they pepper every continent. Then again, 38 of the 79, are loss making or have no profit or loss. And what is more, 18 companies appear to have no revenues o show at all, and this list includes a few which were recently incorporated. Not surprisingly none of its subsidiaries, or its affiliates, has paid any dividends - at least the other income schedule is devoid of any such income generation. Nobody it appears is asking any questions on the one hand, and the directors' report is not giving any clarifications on the other. To be fair however, these companies collectively contributed almost Rs 17 bn to group revenues. More to the point, is there some method behind all this seeming madness?
Other income factor
Another significant aspect of the working results of the standalone Wipro for the latest year is the contribution of 'other income' to the pre-tax profit. Other income at Rs 8.7 bn accounts for a neat 15.4% of pre-tax profit. In the preceding year other income was a negative Rs 4.8 bn. That represents a significant turnaround of Rs 13.5 bn during the year. The big daddy in the other income schedule of IT companies is the hard to foretell forex gains/losses, which can go either way, given that the vast bulk of their income is dollar/euro denominated.
Like the rest of India Inc. which has surplus funds, the company has also developed a taste for funds churning in liquid units of mutual fund schemes. So it bought and sold cumulatively Rs 660 bn worth of units during the year. And, what does it have to show for its efforts? On the face of it, a paltry income of Rs 308 m. It could have earned some interest also by timing the purchase/ sale of these debt instruments, but such interest if any is not readily identifiable.
Where the company comes out trumps is in the accretion to ones holding in Wipro through the liberal issue of bonus shares. If one held 100 shares in Wipro in 1995, one would be the holder of 6000 shares in 2010 after the latest issue of bonus shares in the ratio of 2:3. Leaving out the 5:1 stock split in 1999, the company has issued bonus shares 5 times in the interim. After the latest bonus issue the paid up equity stands at Rs 4893 m, but still considerably dwarfed by its reserves and surplus. In this respect it scores over its IT rivals, though one rival, TCS, has not been in the public domain for all that long.
The company started its fledgling career as a vanaspati oil unit - and hence the name, and then metamorphosed into an IT software and hardware giant. The changeover is almost total. Inspite of its highly publicized acquisitions in the non-IT space, it is the IT space that dominates its very being. The turnover from its new found love accounted for 93% of its gross income, with software alone accounting for 77% of the overall pickings. Today its takings from the vanaspati business are some sort of a 'has been' affair. Income from toilet soaps at Rs 7.5 bn accounts for a mere 3% of all sales - though its recent acquisition of Lornamead, Yardley, and Unza may add a few percentage points more to the income accruing from the soaps portfolio. Nurturing the FMCG biz is a costly and time consuming affair with no measurable time span on when it will start contributing to the corporate kitty. It even has a few nutty businesses like shoe uppers and hydraulic and pneumatic equipment which appear to be around purely for sentimental reasons. So it will be IT, period, which will be driving its sales in the foreseeable future.
Disclosure: Please note that I am a shareholder of this company
This column "Cool Hand Luke" is written by Luke Verghese. 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.