WIPRO LTD: Dreams Face Reality...

The great IT dream is turning into a harsh reality for the Indian IT

companies that had so far enjoyed the most favored outsourcing status for quite

a while. Hopes of revival in this year after almost two years of low demand have

also been thwarted first by the Iraq War and then the SARS scare. Indian

companies are now slowly getting to terms with the scenario of a flat market

with high customer volatility and falling margins. After the disappointing

outlook by Infosys, results of most of the other IT majors have been no

different. Increased marketing costs to generate volume growth and fall in

prices have put margins under pressure of these companies and the result of

Wipro was no different.

Bangalore-based Wipro is engaged in providing software services, product

sales and implementation, healthcare, business process outsourcing, consumer

care and lighting products. The company achieves major revenues from IT related

operations and it provides entire gamut of services that include application

development and maintenance, system integration, package implementation, IT

infrastructure outsourcing and enterprise security among others. These services

are provided to industries such as Telecom, BFSI, Energy & Utilities,

Healthcare, Transportation and Manufacturing. The company also provides product

development outsourcing services in product design services, embedded systems

software, control systems design and system integration to blue ribbon companies

that include Microsoft, Ericsson, Cisco, Epson, HP, Magneti Marelli, NCR, Sony

and IBM.

Wipro provides delivery of its services and products through various

strategic business units among which Wipro Technologies contributes 66% of the

total consolidated revenues of the company. Wipro Technologies provides software

services globally countries except for India, Middle East and Asia Pacific

region. Services to these countries are provided by the other SBU Wipro Infotech.

This SBU also provides System Integration, Infrastructure management, IT

consultancy and products & package implementation services to clients.

The Wipro HealthScience is the Healthcare and Life Sciences business segment

focused on Healthcare delivery system that includes hospitals, physician

practices and health insurance companies. The segment was separated as a SBU

from Wipro Technologies during fiscal 2003 after the acquisition of Hyderabad

based GE Medical Systems Information Technologies Pvt. Ltd., a JV between GE

Medical Systems, US and Citadel Healthcare, US. While most of the Indian IT

firms have started the BPO operations from scratch, Wipro went through the

inorganic route and acquired Spectramind last year. In the consumer care &

lighting segment, the company is focused on soaps, toiletries, vanaspati and

lighting products.

In the full year ended March 2003, Wipro achieved consolidated net revenues

of Rs 4286.55 crore, up 25% and net profit before extraordinary expenses of Rs

846.77 crore, down 5% over the previous year. The net profit would have been

higher but for the net loss of Rs 7.30 crore relating to recently acquired AMS’s

Global Energy Practice. Moreover, Wipro GE Medical Sytems, a JV between Wipro

and GE, incurred loss of Rs 37.10 crore during the year. Operating margins

during the year declined by 293 basis points to 24.63% as salaries and related

expenses went up by 28% to Rs 2625.79 crore and selling, general and other

expenses went up by 35% to Rs 605.12 crore. Revenues from onsite operations

increased from 52% last year to 54% and the company added 120 clients taking the

total active clientele list to 288 Wipro Technologies had staff strength of

13,474 at the end of March 2003. Revenues from Wipro Technologies were up 24%

during the year to Rs 2849.50 crore and do not include revenues from the health

care vertical, which forms a part of Wipro Healthcare segment. Earnings before

interest and tax from this segment stood at Rs 811.04 crore and formed 85% of

the total EBITA reported by the company. Wipro Infotech saw a 10% decline in

revenues to Rs 661.40 crore whereas revenues from Consumer Care were up 48% to

Rs 445.80 crore, revenues from Wipro Healthcare stood at Rs 134.10 crore whereas

revenues from Spectramind stood at Rs 122.40 crore.

Wipro is one of the few Indian companies that have aggressively gone for the

inorganic route to sustain its growth in uncertain environment. Wipro acquired

eSpectramind in various tranches during the year to take its holding to 100%.

The acquisition was made at approximately Rs. 485 crore. In December 2002, Wipro

acquired Global Energy Practice of AMS Inc., which addresses the IT requirements

of enterprises in energy and utilities sector, for Rs. 118.08 crore. Wipro also

acquired the assets related to the two Research & Development centers of

Ericsson India at Bangalore and Hyderabad and the R&D center of EHPT India

at Delhi. Ericsson AB has guaranteed to purchase consultancy services from Wipro

for an amount of US$ 17 million up to December 2004.

In the fourth quarter ended March 2003, Wipro’s net revenues were up 33%

y-o-y and 12% q-o-q to Rs 1230.98 crore. While the operating margins dipped

marginally down from 25.51% in the third quarter ended December 2002 to 24.38%

in the fourth quarter, the consolidated net profit stood at Rs 222.79 crore,

down 4% y-o-y and 3% q-o-q. The company added 44 new clients during the quarter.

The company’s major division, Wipro Technologies, saw a dip in the margins due

to the losses reported by AMS energy practice. Moreover, the company has seen a

decline in the R&D related revenues over the past few quarters and these

formed 37% of total Wipro Technologies revenues in fourth quarter of fiscal 2003

compared to around 50% in the fourth quarter of last year. The company also

witnessed pricing pressure as offshore rates declined by 2.3% and onsite

billing, excluding the AMS acquisition, declined by 2%. Revenues from Wipro

Technologies were up 35% y-o-y and 6% sequentially to Rs 793.20 crore in the

fourth quarter are expected to sequentially grow by around 4% in the next

quarter.

Wipro’s BPO business is doing well and the company expects revenues from

Spectramind to increase from Rs 66 crore in the fourth quarter to Rs 75.60 crore

in the first quarter of fiscal 2004. Spectramind had 9 active clients and added

686 employees during the quarter to take the total strength to 3884.

While the IT sector has been under pressure since the past more than a year,

the last one month has seen a sharp de-rating of the sector. The increased

competition from US majors has put pressure on pricing, further compounded by

rupee appreciation. With the IT spending getting discretionary, we believe that

the bigger companies would continue to offer price discounts to utilize their

capacities and sustain growth through high volume. Overall, we expect the

pressure to continue in the medium term and put pressure on the margins of the

IT companies. Going ahead, we expect Wipro to grow its topline in the next two

years by 24% and 18% and net profit at 12% and 17% respectively.

Wipro is currently traded at Rs 902 discounting our projected March 2004 EPS

by 22 times and March 2005 EPS by 19 times. Post full year results, Wipro’s

share price slipped from Rs 1250 to Rs 860 but have since rebounded to the

current levels. While Wipro expects to sustain the topline growth in the next

quarter, pricing pressure and slow ramp-up are a major cause for concern. Wipro

has been aggressive in acquisitions and continues to look for more opportunities

to expand its revenue mix and capabilities. The company has successfully

integrated the recent major acquisitions and more acquisitions would give

impetus to the stock price. In the medium term however, higher sales expenses,

falling prices and strong rupee would keep the margins squeezed and hurt

profitability. At the current market price, we believe that the market has

discounted the short- term downside of low margins and profitability. Going

ahead however, we believe that size and scale of operations would determine the

future of the IT companies and Wipro would continue to have an edge over the

other marginal players in the polarized IT market. Market Outperformer.

Sushanto Mitra is

the founder of Technology Capital Partners



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.