• MARCH 15, 2004

Wipro: Would the restructuring pay-off?

Wipro Technologies was one of the Indian software companies that were hit hard during the downturn. However, now when clouds of uncertainty seem to be clearing, Wipro has emerged with a completely restructured business model, which does not rely only on R&D outsourcing. Rather, the company has included services like BPO, IT consulting, infrastructure outsourcing and package implementation to de-risk revenues. Let us look at the company's performance in recent times and where it is headed?

** Revenues of IT services

The graph above is indicative of the high levels of volatility in Wipro's IT services revenues in the past two years. While some of it could be attributed to generic trend in the industry (billing rate pressure and inadequate volume growth), some are company specific, like a fairly concentrated revenue stream from technology R&D outsourcing. This problem is somewhat similar to Hughes Software Systems that relied heavily on technology R&D outsourcing for telecom OEMs (original equipment manufacturers). Since the business of R&D was the first to suffer from the global technology downturn in the past few years, Indian companies offering outsourcing services in this stream were among the hardest hit.

Taking a cue from the slowdown, Wipro has restructured its business and has reduced its dependence on R&D spending. And one of the ways to attain this objective was growing inorganically, specifically in FY03. Wipro acquired Spectramind in the BPO space, NerveWire in IT consulting and Ericsson's R&D Centre in the telecom space. The company's strategy is to acquire companies that are niche players and have high levels of competencies in their respective areas of work. Owing to aspects like working in a common culture, these acquisitions are likely to put some pressure on Wipro's performance in the medium term. However, we are optimistic that, in the long-term, they would play a key and constructive role in Wipro's growth.

At the current price of Rs 1,470, the stock is trading at a P/E multiple of 30.9x our FY05 earnings estimates. One of the reasons why the stock has traditionally traded at a premium to the sector is because of the low floating stock. This makes it a risky proposition for retail investors. However, while the management is visionary, Wipro needs a consistent performance over a longer period of time to have a comfort factor with investors. Although the inorganic growth strategy is positive, it could affect the overall performance in the medium term.

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