• OCTOBER 15, 2004

Wipro: ‘String of pearls’ paying off!

Introduction to results
Wipro has reported strong results for the quarter and half year ended September 2004 as both topline and bottomline growth have been robust. Rising offshore contribution and cost control initiatives have also helped the company improve operating margins during both the periods.

Financial performance (Consolidated): A snapshot
(Rs m) 1QFY05 2QFY05 Change 1HFY04 1HFY05 Change
Sales 17,671 19,885 12.5% 25,511 37,556 47.2%
Expenditure 13,256 14,566 9.9% 20,180 27,823 37.9%
Operating profit (EBDIT) 4,414 5,319 20.5% 5,331 9,733 82.6%
Operating profit margin (%) 25.0% 26.7%   20.9% 25.9%  
Other income 284 76 -73.3% 580 360 -37.9%
Interest 11 15 33.1% 11 27 135.0%
Depreciation 514 570 10.9% 883 1,085 22.9%
Profit before tax 4,173 4,809 15.2% 5,017 8,982 79.0%
Tax 611 702 14.9% 592 1,313 121.8%
Minority interest (22) (22)   (14) (45)  
Equity in earnings of affiliates 30 33   (48) 62  
Profit after tax/(loss) 3,569 4,117 15.3% 4,363 7,686 76.2%
Net profit margin (%) 20.2% 20.7%   17.1% 20.5%  
No. of shares 698.4 699.0   232.8 699.0  
Diluted earnings per share* (Rs) 20.4 23.6   12.5 22.0  
P/E ratio (x)   28.4     30.5  
(* annualised)            

About the company
Wipro is the third largest software services exporter from the country and also has interests in the consumer care and lighting business. However, the largest contribution to its revenues come from the global IT services and products division (76% of consolidated revenues). Within the global IT services business, the company derives revenues from application development and maintenance (37% contribution), R&D services (32%), package implementation (11%) and systems integration and consulting (4%). The company also provides BPO services through its subsidiary, Spectramind (11% of global IT services revenue).

What has driven performance?
Global IT services helps topline growth:  Revenues from the global IT services division have grown sequentially by 12% and this is a major reason for the strong consolidated topline growth of Wipro in 2QFY05. Also aiding this growth are other segments like India & AsiaPac IT services and products division (11% QoQ) and consumer care and lighting division (11% QoQ). Strong volume growth and stability in billing rates (rates for onsite have actually improved marginally) have helped growth in revenues for the global IT services division. The BPO business (Wipro Spectramind), which is consolidated with the global IT services division, has witnessed a QoQ revenue growth of 20%.

The company added 34 clients in the quarter, including 10 in R&D services, 21 in enterprise business and 3 in BPO. The strong rate of hiring also continued in this quarter with 3,300 and 2,200 people hired for IT services and BPO respectively. These additions are in line with what Wipro’s peers are doing. As a matter of comparison, in 2QFY05, while Infosys added 5,000 employees, TCS added around 4,000. And this seems in anticipation of increased outsourcing business likely to come India’s way. Wipro, due to its large size and breadth of offerings, is likely to be a key beneficiary of the same.

Rising offshore contribution aids margins:  The 170 basis points rise in 2QFY05 operating margins is mainly a result of marginal improvement in onsite billing rates and increase in share of offshore revenues to Wipro’s consolidated IT services revenues. As a matter of fact, operating margins for the global IT services division have improved sequentially by 100 basis points (to 28%) in 2QFY05. Decline in marketing expenses and administrative expenses have also aided the improvement in overall margins. While the former have declined (as a percent of revenues) from 7.5% in 1QFY05 to 6.7% in 2QFY05, the latter have declined from 5.5% to 4.4%.

Other income affects net profit growth:  Strong growth in topline and a resultant improvement in operating margins have helped Wipro post an even stronger sequential profits growth during 2QFY05. However, this growth in profits is pared by a 73% QoQ decline in other income, which is mainly a result of foreign exchange losses of Rs 117 m in 2QFY05 (from gains of Rs 3 m in 1QFY05).

What to expect?
At the current price of Rs 670, the stock is trading at a P/E multiple of 30.5 times annualised 1HFY05 earnings, which is at the higher end of the valuation spectrum. The stock has risen rapidly in recent times, in line with its peers for the software sector, and much due to increased investor expectations of a faster growth of Indian IT sector in the future.

Wipro’s management expects revenues from the global IT services division to grow sequentially by 6% in 3QFY05, to US$ 347 m. These expectations seem to be based on the fact that the management believes volume growth momentum to continue and pricing environment to remain stable in the future. Also, the ‘string of pearls’ acquisition strategy seems to be paying off for the company as seen by a continuous improvement in operating margins. However, much of the consequent growth already seems factored in the current stock price and, as such, investors need to practice caution. However, a long-term investment in the company is likely to provide investors with adequate returns.

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