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With the dollar reaching a historic low vis-à-vis the rupee, the entire software services sector has been hit by margin pressure. Bigger companies have been able to maintain their margins by leveraging their size as well as renegotiating their contracts upward. Smaller companies, on the other hand, don't have that pricing power, and are further likely to get hurt on margins. As the Indian economy clips at over 8%, the pressure on the dollar is likely to remain, and will continue to hurt export sectors.

While, in the medium term, this may have a negative impact, we believe it is also an opportunity for Indian companies to further fine-tune their business models and treasury operations to reduce the impact. Among the top companies that have successfully weathered the dollar slide is Bangalore based Wipro.

Founded in 1945 and diversified into the IT sector in 1980, Wipro provides IT solutions and services, including systems integration, information systems outsourcing, package implementation, software application development, and maintenance, and research and development services to corporations globally. The company is also engaged in providing software services, product sales and implementation, BPO, consumer care, and lighting products.

Azim H Premji, who is the chairman and the MD of the company, heads Wipro. The equity of the company currently stands at Rs 291.8 crore, wherein promoters hold 79.58%, institutional investors hold 7.14%, Indian public holds 11.73%, and private corporate bodies and others hold the balance 1.55%.

For the financial year ended March 2007, Wipro reported an impressive revenue growth of 41%, amounting to Rs 15,000 crore as compared to Rs 10,626 crore in the previous financial year. Each of the company's 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 of 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.

The company has announced results for the fourth quarter ended March 2007, wherein revenues amounted to Rs 4,333 crore, witnessing a healthy 39% y-o-y revenue growth as compared to Rs 3,113 crore. The Indian and the Asia Pacific IT services and products segment registered a 38% y-o-y growth amounting to Rs 783.7 crore. Revenues from the Global IT services and products segment amounted to Rs 3,048 crore, witnessed a 32% growth whereas revenues from the consumer care and lighting segment registered a 37% growth amounting to Rs 227.5 crore, and other business segments revenues amount to Rs 303.8 crore, up 247% y-o-y. Wipro's India, Middle East, and Asia Pacific businesses recorded 38% y-o-y growth in revenues amounting to Rs 784 crore. The net profit for the period stood at Rs 856 crore, an increase of 39% as compared to Rs 617.9 crore in the same period last year.

The total staff strength of the company at the end of the quarter stood at 67,818 employees, with 50,354 in IT services business, and 17,464 in BPO services. During the quarter, there was a net addition of 14,076 employees with 12,699 employees in IT services business, and 1,317 in BPO services. And, during the period, Wipro appointed Hiroshi Alley as CEO, Japan and China operations. It also entered into a strategic alliance with Ingres to develop open source business solutions. 

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.

Wipro acquired cMango, a US-headquartered company, in a cash deal. It acquires 100% stake in privately held cMango, which includes cash payment of $20 mn closure of the transaction as well as earn-outs based on achieving targeted financial metrics over a two-year period. CMango, will be a part of technology infrastructure services (TIS) service-line of Wipro. Wipro signed a global service contract with GM designed to integrate the company's Middleware Systems and Information Systems and Services (IS&S) software tools around the world.

The company expects for the June 2007 quarter, revenue in Global IT services to be around $711 mn. Given the acquisitions and robust organic revenue growth, we believe the company will be able to maintain its growth trajectory in the medium term, while the falling dollar may mean some marginal decreases in operating margins.

Wipro's shares are currently traded at Rs 567.40, discounting projected March 2008 EPS by 21 times, and March 2009 EPS by 15 times, respectively. Based on growth prospects, we believe that Wipro shares will continue to appreciate in line with rest of the technology sectors, and, therefore, retain our earlier rating on the stock. Market Performer.

Sushanto Mitra
The author is the director, Techcap India
sushanto@techcapIndia.com
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

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