Wipro

Investors with a two-year horizon can buy the shares of Wipro, a leading software services and hardware player, given the revival in volumes (person-months billed) in its IT services business and strengthening domestic presence (IT products) in the light of large deal wins.



Despite the slowdown in IT spends over the last couple of years, the company has managed to hold on to pricing levels quite well when compared with other Tier-1 IT players.

From an industry perspective, the revival in revenue growth, which was an important challenge this fiscal, is well and truly underway, going by the recent results of Infosys and TCS. Wipro generally latches on to the trend in the way its peers do.

At Rs 400, the share trades at 18 times its likely FY-11 per share earnings. This is at a significant discount to peers such as Infosys and TCS making it a reasonable buy.

In FY-10, Wipro saw its revenues grow by 5.9 per cent compared to the previous fiscal to Rs 27,129 crore, while net profits expanded by 18.7 per cent to Rs 4,631 crore. IT services and products businesses account for 89 per cent of Wipro's revenues, with the rest accounted for by consumer products and lighting.

Wipro's consumer products division, which has been strengthened by acquisitions too, has shown a 19 per cent growth in topline for 2009-10, with sequential acceleration in the March quarter. Strong consumer spends have triggered a re-rating of FMCG stocks with many mid-sized players now trading at 22-25 times their forward earnings.

A revival in its key verticals such as manufacturing, which has enhanced contribution to revenues steeply in a difficult year, improving traction in the BFSI segment as well as energy and utilities bode well for a broad-based growth for the company. Wipro has not been significantly affected by the euro zone crisis; Deal wins in the US that are large and spread over many years clearly signal revival in client IT spends, compensating, to some extant, for the slowdown in Europe.

Operationally, Wipro has managed to improve on key operating metrics such as fixed-price billing, efforts-mix and utilisation on the back of strong volumes that has given it a blend of growth aided by margin expansion in a challenging 2009-10.

Domestically, Wipro Infotech, its products arm, has managed to land up projects in several growth segments such as telecom and the government that lend revenue visibility.

Business improvements

Wipro has the lowest exposures to the BFSI segment among Tier-1 IT players. Manufacturing and healthcare (24 per cent of revenues), technology business (telecom services, media and technology — 26 per cent) and retail and transportation (15 per cent) all make for a well-diversified vertical-mix.

Manufacturing and healthcare vertical has, in fact, increased its contribution to revenues by 4 percentage points over FY-10. BFSI too has grown and in recent quarters there have been large deal wins such as the seven-year insurance contract from The Main Street America group. Within the technology business, media has grown; telecom has declined marginally, while the core technology segment has fallen steeply. The company is also seeing revival in the retail segment in Europe, besides energy and utilities (this segment has increased contribution to 9 per cent of revenues). Wipro's European operations have grown marginally in 2009-10, suggesting that it may have tided the crisis in the continent reasonably.

Domestically, the company has won IT outsourcing deals from Unitech Wireless (estimated to be Rs 2,500 crore) spread over nine years, with Delhi International Airport (DIAL) over a 10-year period and a 10-year deal from Punjab & Sind Bank, among others. These deals come on the back of strong wins from the government and other rapidly growing telecom players such as Aircel. A report from IDC suggests that the domestic IT market would grow 13 per cent in 2010 to Rs 10,7655 crore. Wipro appears well-placed to capture a significant portion of this expanding pie.

Operational improvements

Wipro has been able to increase the proportion of fixed-price contracts to 41.5 percent in FY10 compared to just 34 percent in FY-09. Fixed-price contracts ensure better realisations compared to time and material.

The company has also increased its offshore component of revenues to 50.2 per cent a significant rise over the previous fiscal. This has ensured that despite a wage hike costs are optimised. The company has also ensured increase in utilisation by a couple of percentage points to over 71 per cent, especially on the revival in volumes over the last couple of quarters. Together, these moves have helped Wipro hold on to and expand margins on the back of improving revenue growth.

The company has added 10 clients in the $5-10 million category and four in the $20-50 million band, suggesting a return to ramping up revenue growth. The contribution of its top 10 clients in FY10 has remained stable vis-à-vis FY09.

Risks

Attrition at 15.4 per cent is a key execution risk. This may increase in the June quarter as is normally the trend with most top-Tier IT companies. Any significant wage hikes could strain margins.

via BL