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WIKI ANALYSIS
Wipro Limited (NYSE: WIT) is a global information technology (IT) services provider. The company makes software and hardware and provides outsourcing services to foreign corporations. Wipro has over 72,000 employees and 647 clients.
Wipro has been a prime beneficiary of the outsourcing boom that has taken place in India throughout the 2000s. The company's revenue grew by 450% from 2002 to 2007. That said, this success has led to higher salaries (wages have been growing by more than 14% per year since 2005), putting pressure on the company's margins. [1]. Moreover, Wipro's model is personnel intensive and its continued rapid growth will depend on the ability of the company to successfully attract large amounts of skilled labor - a scarce resource in a tight labor market.
Exchange rates also have important short-term and long-term implications for Wipro. 60% of the company's revenue came from the US in 2007. During the same year, the company lost $5.5MM [2] due to the depreciation of the dollar against the rupee. In the long-term, if the dollar continues to weaken against the rupee outsourcing will continue to become more expensive for American companies. For some of these companies, outsourcing represents only 50% of the cost savings that it did 3 years ago.
Company Breakdown
Services:
Wipro provides the following services:
- Development and Maintenance: The company develops information technology products and offers maintenance support in case of a breakdown.
- Consulting: Companies hire Wipro for consulting services pertaining to information technology.
- Testing: Wipro tests IT systems for efficiency and effectiveness.
- Package Implementation: Wipro gives information on making decisions about choosing the right package to run applications.
- Business Process Outsourcing (BPO): Companies contract Wipro to complete specific business tasks.
- R&D services: Wipro designs software and hardware (including chips).
- Infrastructure outsourcing: Wipro sets up IT infrastructures for companies.
R&D services is the largest segment for Wipro generating 35% of total sales in 2006. This is followed by development and maintenance which accounted for 23%.
Industries:
Wipro serves the following industries:
- Financial services
- Retail
- Energy
- Manufacturing
- Media and Transportation
- Product engineering
- Telecom
- Healthcare
Wipro's two largest industries are product engineering and financial services respectively at 28% and 23% of revenues in 2006.
Geography:
Very much like its competitors, Wipro gains the vast majority of its sales from the US and Europe, 48% and 25% respectively. This makes Wipro more vulnerable to shifts in the US and European markets, as well as the global economy. [6]
Trends and Forces
WIT to Leverage power with the new suite from Informatica (INFA)
Wipro Technologies (WIT) will use it to provide data migration to its customers worldwide. The Informatica offering will underpin Wipro's Data Migration Shared Services.
Wipro, which provides integrated business, technology, and process solutions on a global basis, will use the Data Migration Suite to automate and streamline the process. This includes creating all data mappings required to migrate data from and to any system, discovering data quality issues at their source, and cleansing and converting the data as part of the overall migration.
The primary targets for the offering will be data migrations in support of new applications including ERP / implementations and upgrades, legacy system modernization, application instance consolidation, mergers and acquisitions, and outsourcing.
Informatica says its new suite, which provides an independent software platform designed for data migration, will include the company's PowerExhange, PowerCenter, Data Explorer, and Data Quality. The company says the new offering is designed to ensure the success of data migration projects. They are also addressing the crucial issue of data access by packaging its data integration software as Informatica Data Migration Suite, with an eye toward providing a solution for companies involved in mergers and acquisitions, consolidation, and outsourcing.
With the shifting landscape of business today, as well as such innovations as service-oriented architecture [SOA], reliable data access is more important than ever to provide the organizational flexibility necessary to respond to internal demands and external pressures.
Maintaining growth difficult in competitive labor market
Wipro has had an average annual growth of 43% from 1999 to 2006. Wipro like other firms in its line of business has a personnel intensive model. To sustain a rapid revenue growth, it has to continue to hire large numbers of skilled employees. Wipro has effectively increased its workforce by about 60,000 since 2001. Ironically, India's economic rapid economic growth has increased competition for skilled employees and will make future growth both more difficult and more expensive.
Wage inflation puts pressure on margins
Demand for IT professionals has dramatically increased over the past several years. India has become a primary source for IT professionals and as a result, salary inflation has boomed. Over the last few years salaries for Indian IT professionals have had an average annual growth of 15%.[7] This large annual increase puts pressure on Wipro's margins and makes it more difficult to lower costs effectively.
Weakening dollar hurts profitability
Wipro gets the majority of its business from outside India. Most foreign companies are attracted to the low costs of outsourcing to Wipro and other Indian companies. As a result, Wipro feels the impact of foreign exchange fluctuations more than most companies. A strong rupee can be detrimental to Wipro’s operating margins. In 2006, the exchange rate of Indian Rupees to US Dollars was around 45, but in 2007 an appreciating rupee ended the year at just over 39. [8] In the fiscal year ending March 31st, 2007, Wipro lost $5.5 million due to foreign exchange rates.[9] During that fiscal year the Indian Rupee vs. US Dollar exchange rate dropped from 44.3 to 43.8. [10] In the long term, wage inflation and the continued depreciation of the dollar, means that outsourcing is less affordable to the U.S. clients.
Competitors
Infosys Technologies (INFY): Infosys is a major competitor to Wipro. Infosys had an operating margin of 27.57% compared to Wipro's 22% margin in FY2008. [11]
TCS: TCS is a major competitor to Wipro. TCS had an operating margin of 28.17% in FY2008 compared to Wipro's 22% margin in FY2008. [12]
Satyam Computer Services (SAY): Satyam is a global IT solutions provider. It had revenues of $1.47 billion in 2007 and an operating margin of 26%. [13]
Cognizant Technology Solutions (CTSH): Cognizant provides custom IT consulting and technology services. Cognizant had revenues of $1.42 billion in 2006 and an operating margin of 18.2%. [14]
References
- ↑ Seeking Alpha "The Coming Death of Indian Outsourcing" March 3, 2008
- ↑ Wipro 2007 20-F pg.107
- ↑ Wipro 2006-2007 Annual Report pg.4
- ↑ Wipro 20-F's from 2005-2007
- ↑ Wipro 2007 20-F pg.34
- ↑ Wipro 2007 20-F pg.34
- ↑ Information from Morningstar
- ↑ Foreign Exchange Rates
- ↑ Wipro 2007 20-F pg.107
- ↑ Foreign Exchange Rates
- ↑ page 19
- ↑ [1]
- ↑ Satyam 2007 Annual Report, pg.100
- ↑ Cognizant 2006 Annual Report, pg.1
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