Wipro Ltd. : Will its unique strategies be the key for long-term growth?

Wipro’s 10 YEAR X-RAY: Green (Very Good)

Wipro, in Brief:

Wipro Ltd is the 3rd largest provider  of IT Services in India. The company provides comprehensive IT Solutions and Services, including systems integration, information systems outsourcing, IT- enabled services, package implementation, software application development and maintenance, and research and development services to corporations globally. They also provide consumer products, lighting, furniture, infrastructure and hydraulic business.

Share Holding Pattern:

The promoter shareholding in the company as on 30th June 2010 is 79.45 % whereas 18.9% is the non-promoter holding. Foreign Institutional Investors holding stands at 6%, Mutual Funds hold 0.6% and Insurance companies 1.03%.

What does Wipro’s past say?

Wipro has performed robustly in all its parameters over the last 10 years. Its impressive fundamentals in the past form a strong base for its future.

Its Net Sales CAGR of 25% over the last 10 years clearly shows increasing demand for its services and products. A good re-investment of 27.6% has helped the company grow its EPS by an impressive 24% over the last 10 years.

The company has managed its funds efficiently, evident from its 6 year ROIC average of 28.4%. It has a comfortable Debt-to-Net Profit ratio of 1.14, indicating that the company will be able to pay off its debts in a little over a year’s time.

On a consolidated basis too, the company has performed well, growing its Net Sales by around 27% CAGR and EPS by around 23% over the last 10 years.

Hence, the 10 YEAR X-RAY of the company is Green (Very Good).

To view its 10-year financial data in a simple color-coded X-RAY visitMoneyWorks4me.com

Operating Margin analysis with peers:

Let’s look at how Wipro has performed with its operating margins against peers of the like of TCS and Infosys in the last 6 years.

Wipro’s margins have been lower than its peers of Infosys and TCS. Wipro has had an average margin of 25% over the last 6 years, where TCS (29%) and Infosys(36%) have had higher margins. The main reason for this is:

Wipro’s revenue mix which includes a higher chunk of IT products(14%), in comparison to TCS(3%) and Infosys’s(4.5%). The operating margins of IT products are much lower than that of IT services. Also, its consumer care & lighting division that contributes 11% to its total revenues has an operating margin of around 13%.

Further, you can see that Wipro has been witnessing a downward trend in its margins till FY09 and then it suddenly jumped in the last year to 27%. This margin rise was contributed majorly by the rise in other income.

What is Wipro’s Short-term Outlook?

What is in store for the company in FY11?

Demand for Packaged implementation services to drive growth in short-term: A healthy 10% growth in packaged services in the previous quarter and the increasing investments by companies (especially retail, manufacturing, energy & utilities) in this service is expected to drive the revenue growth in the next few quarters

Wipro launched FluidState Data Centers: Wipro launched its FluidState Data Centers targeted at small, medium and enterprise businesses. This is a predesigned, prefabricated Data Center which can be setup in less than a week – almost 10 times faster than a conventional Data Center. Hence, this product is expected to be a preferred choice among its clients.

The company expects Santoor and Chandrika brands to drive growth in the personal care segment. It also took over Yardley (premium toiletries brand from UK) which is expected to contribute to the revenues in coming quarters

One concern the company faces is the slowdown in the US and Europe markets. Since, the company gets more than 80% of its revenues from these geographies, it can affect the company’s revenues.

Most of the Indian IT firms are expected to report good growth in the next few quarters on the back of continued demand for IT services from US market and the revival in the discretionary spending on technology. The company has also given a good growth guidance in IT services for the September quarter.

Hence, we can expect the short-term outlook of the company to be Green (Very Good).

What is Wipro’s long-term outlook?

First let’s see the factors which have helped the company grow in the past & will continue to do in future?

1) Products & Software services with ‘High Switching Costs’ are a competitive advantage:

A company has ‘high switching cost‘ as its competitive advantage, when clients find the cost/effort of switching from any of its product/service not worth the trouble. Stock Shastra #8 highlights the importance of having ‘high switching costs’ as a competitive advantage.

Wipro is a very good example of how this unique advantage has helped the company to be a winner. The company generates most of its revenues from repeat business.  The company derives an average 95 % of its revenues from repeat business from its clients. This clearly shows that customers find it difficult to switch from its services and products. This is further complemented with all these clients being well-placed across a diverse base of industries which removes the reliance on any particular industry.

2) Future Opportunities inseparably linked with IT:

Combined with theis advantage of high switching costs is Wipro’s clients’ ever-increasing dependence on technology. While moving up the growth path, every client depends more and more on technology for every task. Wipro has witnessed a growing need from companies to select a partner, rather than just a supplier. Also, customers are looking for end-to-end solutions, where they don’t have to deal with multiple companies to fulfill their requirement. Hence, companies like Wipro, which offer a range of integrated IT services  are always preferred. Also, Wipro endeavours to continuously increase its scope for IT-led solutions & innovations with every client, hence making it more difficult for the companies to switch.

So, what are the unique strategies/factors that will help it grow in the future?

1) ‘String of Pearls’ strategy to focus on new geographies:

Wipro had started with its ‘String of Pearls’ strategy to focus on acquisitions in order to plug gaps in clients offerings. This was on a pause in FY 09 due to the downturn. But now, Wipro is again bringing this strategy into action by focusing on new geographies like Latin America and Africa. They are planning on organic & inorganic routes to extend their footprint in these geographies, as they are growing at much faster pace than US and Europe right now. Wipro has a very small presence in these countries and  wants to increase its presence in these countries. Hence going forward, it can be expected that these geographies will contribute a higher % to Wipro’s revenues

2) Non-linear growth to support margins:

Wipro is aiming for a significant rise in its non-linear revenues (revenues which involve work that do not increase workforce/headcount). Non-linearity which is 10% of Wipro’s revenues right now, are expected to contribute 14% in FY11. Going forward, the company is  expecting  a big chunk of its business to come from the non-linear segment. For this, it is taking certain initiatives. For eg: Increasing expertise in Shared Services Model i.e. a delivery model which ensures that while a company can add more work into the system they do not have to add more headcount. Increasing the share of this segment in its revenues is expected to support margins of the company.

3) Multi-year contracts to drive growth:

Wipro is witnessing the inflow of many long-term contracts which are expected to drive future revenue growth.

•    Wipro and Central Bank of India signed 5 year Strategic Partnership to provide state-of-the-art, technology-driven, core banking solution for seven sponsored Regional Rural banks

•    It has signed a 7 year Total Outsourcing contract with 5 RRBs sponsored by UCO Bank, a leading Public Sector Bank.

•    Wipro recently signed Outsourcing Services Agreement with Citibank N.A. and has taken over Citi’s Data Center in Meerbusch, Germany

These contracts give revenue-visibility for the long-term.

4) Diversification into eco-energy business to serve as a future opportunity:

As a part of its infrastructure business, Wipro has recently diversified into eco-energy business. Their approach here is to selectively pick customers which have a very high energy and water requirement. They will then analyze their requirements through consultancy and give them a set of recommendations they can save anywhere from 10% to 30% on the cost of energy. For this business, the company already has an order-book of Rs. 185 Cr. to be completed over the next few months. This service of the company is expected to be a future growth driver.

So, after looking at its positive points, is there anything you should be concerned about?

a)    Geography wise, its revenues are highly dependent on clients located in the U.S. and Europe, an economic slowdown in these countries/industries may affect its business

b)    Currency fluctuations may bring down profitability

c)    Intense competition by global firms such as Accenture Limited, Capgemimi, Hewlett-Packard Company, & Indian firms – Infosys, and TCS etc. may put pricing pressure as well as affect demand for its services.

Despite these concerns, looking at the robust growth expected in the demand for IT services & solutions, Wipro is well -placed to record good growth. Hence, we can expect the long-term future of the company to be Green (Very Good).

Conclusion:

Wipro is the 3rd largest IT services and solutions provider in India. It is poised for good growth in future considering 95% repeat business from existing clientele and its clients ever-increasing dependence on IT.

Yes, Wipro is an investment-worthy company, but is it at a good price to buy? Or is the market overvaluing it? To find out what investment decision you must take on Wipro right now, become a member of www.MoneyWorks4me.com to find its right value.

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