WIPRO: Stepping on the Gas

The upswing in the technology services markets has prompted IT services
companies in India to go back to the days of large recruitments and creating new
infrastructure for increased business. This time around, the lessons of the past
have not been forgotten. A chastened India Inc. is doing things slowly and more
deliberation than the past and even long overdue salary increases are being done
in a phased manner rather than a knee jerk reaction.

This speaks volumes of the maturity the sector has reached and the strong
management practices the top IT services companies in India. At the same time,
this means that future revenue and profit growth of these companies will remain
within a band of 15-20% per annum, a far cry from the 50-60% growth rates
witnessed in the nineties. Among the leading IT services companies in India,
Wipro too is no exception to the rule. While the company is likely to see a
strong growth in revenues from the telecom and technology sectors recovering
from their past problems, slower capacity buildup and focus on margins will
ensure that sales growth will remain somewhat subdued.

Founded in 1945 and diversified into the IT sector in the year 1980,
Bangalore-based Wipro with a campus spread over 4,64,000 sq. ft. 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 services like
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, HP, IBM, Boeing,
Ericsson, Toshiba, Cisco, Seagate, Putnam Investments, United Technologies, Best
Buy, Digital, Friends Provident, IBM, Microsoft, NCR, Thames Water, Transco and
Sony.

Wipro is headed by Azim H. Premji, who is the chairman and the managing
director of the company. The equity of the company currently stands at Rs 46.5
crores, wherein 84% is held by the promoters with foreign institutional
investors, banks and mutual funds holding 4%, Indian public holding 7% and the
balance 5% is held by private corporate bodies and others.

For the full year ended March 2003, Wipro achieved consolidated net revenues
of Rs 4,286.6 crore, up 25% and net profit before extraordinary expenses of Rs
820.5 crore, down 5% over the previous year. 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. The global IT services and products segment
contributed 66% of the total revenues followed by India and AsiaPac IT services
and products contributing 19%, customer care and lighting contributing 7%, IT
enabled services, Wipro health services and others contributing 4%, 2% a piece
respectively. The company’s largest customer accounted for 8% of the total
revenues earned during the financial year ended 2003 and the top 5 and top 10
customers accounted for 24% and 38% of the revenues respectively.

Wipro’s results for the quarter ended December 31, 2003 reflect the
improved outlook for outsourced services. Revenues for the quarter amounted to
Rs 1,515.5 crores as compared to Rs 1,364.5 crores in the previous quarter of
the same fiscal and Rs 1098.4 crores in the same quarter last year, up 11%
sequentially and 38% y-o-y. The global IT services and products segment
contributed 75% of the total revenues earned during the quarter followed by
India and AsiaPac IT services and products, customer care and lighting and other
segments contributing 16%, 6% and 3% respectively. The three geographical
segments comprising of USA contributed 54% of the total revenues whereas India
and the rest of the world contributed 23% each. The net profit was Rs 274.1
crores as compared to Rs 230.2 crores in the previous quarter of the same
financial year and Rs 230.6 crores in the same quarter of the last fiscal, up
19% q-o-q and y-o-y. The company currently employs 27,137 employees that include
17,681 employees in IT Services business and 9,456 employees in IT Enabled
services business. The net addition for the quarter ended December 2003 was
2,872 employees comprising of 1,908 in IT services and 964 employees in
IT-enabled services.

During the last quarter, Wipro initiated a number of alliances and large
client acquisitions that will result in long-term sales traction. The company
signed a partnership with Excelergy Corporation to jointly market platforms for
critical business processes in the energy and utility industry and other complex
value chains. The alliance will cover North America, Asia Pacific, Europe and
the Middle East. Wipro also announced that Exel, a UK based logistics and
transportation company had chosen them as their strategic partner to provide
offshore application development for its core freight forwarding system.

The company and MetaSolv Software Incorporated, a telecom software solutions
provider, formed a strategic alliance and entered into a reseller agreement to
jointly deliver comprehensive Operations Support System solutions to global
service providers. Wipro recently worked with NTL Home, a UK-based ISP, to
develop its Broadband Plus portal that will provide content from fifteen leading
premium content providers. Broadband Plus which is a unique broadband service
that provides an ‘access all areas’ pass to some of the best paid-for
premium content on the web, bundled together for the first time, at a fraction
of their standalone prices. Broadband Plus has also been designing with NTL Home’s
highly specified 600Kb and 1Mb Broadband products in mind. This new added value
service features extensive video and interactive content to appeal to the higher
speed broadband users.

Wipro’s last two quarter results show, improving margins with moderate
sales growth and we expect that the trend will continue as the company aims at
improving margins by acquiring orders with higher profitability and slowly move
out of lower priced contracts at the same time maintain a steady sales
growth-rate. Consequently, margins, despite salary hikes and increased
recruitment in the next couple of quarters will be more than balanced by
improved revenue realizations.

Wipro is currently traded at Rs 1723 discounting our projected March 2004 EPS
by 42 times and March 2005 EPS by 34 times. This is almost 150% over its 52 week
low and given its 20-25% earnings growth limits significant market out
performance in near term. At the same time, the stock is expected to appreciate
in line with other IT stocks as the sector reaffirms its prime position in
investor portfolios. Market Performer.

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