Wipro: Majoring in Acquisitions

The route of acquisitions has been a key strategy of Indian
software majors to rapidly develop marketing presence and domain knowledge in
key geographies and underserved verticals. What began tentatively around the
year 2000 has now become a regular feature for these companies. Majority of
these acquisitions have been focused on developing the front ending and
consulting capabilities of Indian companies. Part of this strategy is also to
get the back-end of the target companies to relocate to India so as to reduce
costs.

In the longer term, these acquisitions would further globalize
the operations of the companies and help them truly become local companies in
their geographies where they operate. Investors also welcome such acquisitions
as they make productive use of the large idle cash reserves that most of the
companies carry in their books. As the IT services sector mature, investors
would also look deeper into the transactions to see how the synergies operate,
and also see whether the company is able to integrate not only the legal
entities, but also the people and processes behind them.

Bangalore-based Wipro has been among the most aggressive
acquirers from India in the recent past, and the last few months have seen a
flurry of activities in this area. We believe that in the medium term, the
organic growth strategy would also help Wipro to develop into a more nimble
organization, and become more competitive in the marketing areas, which was,
sometimes back, considered a weakness for the company.

Wipro Tech is an information technology service company
established in India in 1980. It is the global IT services arm of Wipro. It is
headquartered in Bangalore and its employee strength was more than 70,000 till
September 2007.

Wipro Technologies has over 300 customers across the US, Europe,
and Japan including fifty of the Fortune 500 companies. Some of its customers
are Boeing, BP, Cisco, Ericsson, IBM, Microsoft, Prudential, Seagate, Sony,
Windriver, and Toshiba. It has dedicated development centers and offices across
India, Europe, North America, Latin America, and Asia Pacific.

The current chairman, managing director, and majority stake
owner is Azim Premji, who has headed the software and hardware divisions since
Wipros inception. Premji completed bachelors degree in electrical
engineering. The Indian Institute of Technology, Roorkee, and the Manipal
Academy of Higher Education have both conferred honorary doctorates on him,
while XLRI, Jamshedpur has conferred the Sir Jehangir Ghandy Medal for
Industrial and Social Peace. Premji is also a non-executive director on the
board of RBI. The equity of the company currently stands at Rs 291.8 crore,
wherein promoters hold 81.44%, institutional investors hold 6.23%, Indian public
holds 7.93%, and private corporate bodies and others hold the balance 4.4%.

For the financial year ended March 2007, Wipro reported an
impressive revenue growth of 41% with revenues touching Rs 15,000 crore as
compared to Rs 10,626 crore in the previous financial year. Each of the companys
business segments reported strong growth with the Indian and the Asia Pacific IT
services and products segment registering a 46% growth amounting to Rs 2,483
crore as compared to Rs 1,704 crore in the last year. Revenues from the global
IT services and products segment amounted to Rs 11,094 crore as against Rs 8,066
crore, up 38%, whereas revenues from the consumer care and lighting segment
registered a 36% growth, amounting to Rs 818 crore against Rs 600 crore.
Revenues form its US offices amounted to Rs 7,270 crore, up 37% as compared to
Rs 5,308 crore, whereas revenues for the same period from India witnessed a 40%
annual growth amounting to Rs 3,137 crore as against Rs 2,243 crore. Rest of the
world registered a 40% growth in the revenues to Rs 896 crore as compared to Rs
642 crore. The net profit for the same period stood at Rs 2,942 crore as
compared to Rs 2,067 crore, up 42% on annual basis.

During the year, Wipro announced it has signed an agreement to
acquire India, Middle East, and SAARC operations of 3D Networks and Planet PSG
in all cash deal. Wipro entered into a partnership with Apriso to provide
manufacturing enterprises multi-site implementations. Wipro has formed alliances
with supply chain solutions provider Manhattan Associates, Mark Logic, and a
joint venture with Motorola (named WMNetServ), which will deliver outsourced
telecom services to help focus on their core business. Also, Wipro acquired
Europe-based retail solutions provider, Enabler, in an all cash deal. It also
acquired US-based Quantech Global Services, a mechanical design services firm.

For the quarter ending June 30, 2007, revenue increased to Rs
4,203 crore compared to 3,143 crore last year, an increase of 34% y-o-y. Profit
after tax stood at Rs 726 crore compared to Rs 620 crore, an increase of 17%
y-o-y. During the quarter, Wipro added thirty-nine new clients in the global IT
services and products. The company bagged $130 mn multi-year total outsourcing
engagement from a utility company in Europe. Similarly, Wipro and Cairn India
partnership won the FAO Research Award of Distinction in the finance and
accounting space. The company also bagged SAPs Pinnacle Award for Software
Solution Leadership and Forrester rated Wipro as Leader in global IT
outsourcing. Also, the company has decided to merge some of the subsidiary
companies with the company, through two schemes of amalgamations.

For the quarter ending September 30, 2007, the company has
projected revenues from Global IT services business to be around $777 mn. Given
the continued growth in the last few quarters as well as the new acquisitions,
we believe Wipro will maintain its revenue growth in the medium term, though
margins may get impacted in the medium term.

The shares of Wipro trade at Rs 476, discounting its FY 08
earning by twenty-one times. Given its moderate growth of earnings and
increasing pressure on margins going forward, we believe that the stock is fully
priced. Market Performer.

Sushanto Mitra

The author is director, Techcap India

sushanto@techcapIndia.com

The views reflected here are of the author and not of this publication.

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