From THE HINDU group of publications
Sunday, July 29, 2001


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Wipro: Hold/Avoid fresh exposures

Recommendation: Hold/Avoid fresh exposures

Krishnan Thiagarajan

IN WHAT may be termed as one of the toughest quarters for Wipro Technologies, its software and services division has managed to record a fairly good performance. The focus of the earnings review has been on Wipro Technologies, representing the Global IT services business segment of Wipro.

The Global IT services segment accounted for 65 per cent of the total revenues of Wipro in the first quarter ended June 30, 2001. Total revenues grew 46 per cent in the first quarter of 2001-02 (at the same rate as in the fourth quarter, although considerably lower than 88 per cent in the third quarter of 2000-01) to Rs 521 crore. Similarly, the growth in profit before interest and tax was 70 per cent at Rs 189.6 crore, lower than the growth rates of 76 per cent and 117 per cent recorded in the 2000-01 fourth and third quarters.

Wipro Technologies (representing the Global IT Services business segment) performance in the first quarter ended June 30, 2001, was a litmus test for three key reasons. First, Wipro had planned to terminate its relationship with General Electric (its biggest client at the time of its ADS offer last year) by the end of this quarter and obviously the need to substitute it with fresh business was imperative.

Second, Wipro's exposure to telecom equipment vendors was fairly high, leaving them vulnerable to a sharp decline in business volumes, going forward. As its top R&D clients such as Nortel Networks, Cisco, Compaq and Lucent had scaled down operations substantially over the past two quarters, it was likely that Wipro might suffer a drop in business volumes.

Finally, the slowdown in the semiconductor industry did not leave much scope for Wipro's focus in the technology domain -- mainly hardware design and development to yield encouraging revenue growth.

Despite such a tough business environment, Wipro's Global IT services segment managed to brave the odds, which is evident from the following business variables:

*Strong R&D business: Although the enterprise solutions unit (with its focus on e-commerce services and customised applications) is likely to generate higher business volumes in future, the scope for margin growth will mainly be from R&D services. To that extent, the R&D services unit holds the key to Wipro's future and needs to be monitored closely.

*Systems integration -- a new business opportunity: The breakthrough achieved by Wipro in the global systems integration domain may be a big step forward. The company has bagged a contract of $70 million (one of the biggest orders bagged in the industry in recent times) from the telecom subsidiary of UK-based Lattice Group Plc. The revenues, in excess of $30 million, is expected to be logged largely in the second half of this year.

*Client and geographic concentration: The client concentration levels of Wipro continue to remain fairly stable. Similarly, Wipro has managed to broadbase its contribution from Europe marginally at the US's expense.

*Stable margins: Despite a tough external environment, the profit before interest and tax margins of Wipro have remained fairly stable. In the first quarter, the margins improved by one percentage point to 36.39 per cent.

While these are clear positives for Wipro, if the US slowdown intensifies and spreads to Europe, the following factors may turn to be a cause for concern:

*Scalability is the key: The sequential (quarter on quarter) growth rates in revenues have dropped to 0.75 per cent in the first quarter, from 7.72 per cent in the fourth quarter, 15.13 per cent in the third quarter and 17.27 per cent in the second quarter of 2000-01. A similar trend can be seen in the sequential growth rates of profit. It remains to be seen whether the slowdown will affect the scalability of such frontline majors as Wipro.

*Billing and utilisation rates: In a difficult first quarter, Wipro has managed to record a sequential increase in on-site realisation of 2.6 per cent and offshore by 3.4 per cent. However, this increase in the billing rate is lower than in the past. If the slowdown intensifies both in the US and Europe, the pressure on billing rates (particularly on-site) and lower utilisation rates may loom large.

Despite a good performance, investors may refrain from taking investment exposures in Wipro till the second quarter earnings performance is announced. However, investors with a medium-term perspective may stay invested as the business fundamentals continue to remain strong.

Pic.: Mr Azim Premji, Chairman, Wipro.

Related links:
Wipro Q1 net up 97%
Wipro: Focus on systems integration
Wipro mulling acquisitions

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