Wipro Limited: Getting Into Stable Mode

The strong business model built by the Indian software services companies has
now reached a stage where stable and continuous growth has become a part of
their DNA. Consequently, when companies regularly show 30-35% growth, no one
really shows any surprise. However, it's rare in any business to find
companies that regularly show such growth y-o-y and q-o-q for long periods of
time. It remains to be seen how well Indian companies are able to maintain this
track record.

Going forward, these companies are looking at strategies that will maintain
this growth without significantly affecting margins and the quality of their
earnings over the next couple of years. Consequently, these companies are
focusing on larger accounts that show stable revenue growth over a longer period
of time without significantly impacting margins. While these do de-risk the
overall company business model, they do lead to long-term decline in margins.
What Indian companies are hoping is that with a mix of innovative cost-cutting
measures and the benefit of scale they will be able to limit the decline in
margins to the minimum. Among the companies who have been pursuing this strategy
with reasonable success is Bangalore-based Wipro Limited.           

Founded in 1945 and diversified into the IT sector in the year 1980,
Bangalore-based Wipro is a PCMM Level 5 and SEI CMM Level 5 certified IT
Services company with operations across the globe. The company provides IT
solutions and services, including systems integration, information systems
outsourcing, package implementation, software application development and
maintenance, and research and development services to corporations globally. The
company is also engaged in providing software services, product sales and
implementation, business process outsourcing, consumer care and lighting
products. These services are provided to industries such as telecom, BFSI,
energy and utilities, healthcare, transportation and manufacturing.

Azim H Premji is the chairman and managing director of the company. He took
over leadership of Wipro at the age of 21 when the turnover of the company was
around Rs 9 crore, and operated in vegetable oils only. The equity of the
company currently stands at Rs 284.1 crore, wherein the promoters hold 81.4%,
institutional investors, hold 6.2% while the balance is held by the Indian
public, private corporate bodies and others.

For the financial year ended March 2006, Wipro reported an impressive revenue
growth of 30% taking revenues to Rs 10,625.8 crore, as compared to Rs 8160.5
crore in the previous financial year. Each of the company's business segments
reported strong growth with the Indian and the Asia Pacific IT Services &
Products segment registering 40%. Revenues from the Global IT Services &
Products segment amounted to Rs 8066 crore against Rs 6075.3 crore, up 24%,
whereas revenues from the consumer care and lighting segment registered a 20%
growth, amounting to Rs 600.8 crore against Rs 225.8 crore. The net profit for
the same period stood at Rs 2,067.3 compared to Rs 1,628.5 crore, up 27%. Amidst
the applause, it must be noted that profits are not keeping pace with revenue
growth, leading to a gradual erosion of margins. We believe that while there may
be temporary improvement in margins in the current year, these would eventually
decline over a period of time. 

The company announced results for the fourth quarter ended March 2006,
wherein revenues amounted to Rs 3,113.2 crore, witnessing a healthy 35% y-o-y
revenue growth. The Indian and the Asia Pacific IT services and products segment
registered a 18% y-o-y growth amounting to Rs 569.5 crore, while global IT
services revenues stood at Rs 2,317.10 crore up 41% on an annualized basis.
Consumer care and lighting contribution was at Rs 165.8 crore showing a 7%
growth. During the quarter, Wipro announced acquisition of cMango Inc in
Business Services Management space. The integration is planned from the first
quarter of the current year. The net profit of the company amounted to Rs 617.9
crore, up by 43% for the current quarter. Wipro added 42 new clients out of
which five were from Fortune 1000 or global 500 corporations. Seventeen new
clients were added in the product engineering space, which is emerging as a key
strength for Wipro.

The total staff strength of the company at the end of the quarter stood at
530,742 employees, with 37,655 in IT services business and 16,087 in BPO
services. 

The company expects a robust June quarter, with 6% growth in global IT
services revenue to $533 mn against $504 mn in Q4 FY06. The company is also in
the market for a couple of acquisitions and we believe that it would better the
sequential revenue growth to over 7% for the full 2007 fiscal thereby showing an
overall of around 30% for the full year. A similar growth can be expected in
subsequent years. The margins of the company would, however, decline by a small
measure in the next couple of years as competition and rising salary costs
impact them.

Wipro's shares are currently traded at Rs 441 discounting projected March
2007 EPS by 23 times and March 2008 EPS by 17 times respectively. Based on the
growth prospects we believe that Wipro shares will continue to appreciate in
line with the rest of the technology sector and, therefore, retain our earlier
rating on the stock. Market Performer.

Sushanto Mitra

The author is the founder of Technology Capital Partners

sushanto@techcapIndia.com

The views reflected here are of the author and not of this publication. No
liability is accepted for losses based on the information presented here