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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. Specifically, Wipro provides 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. Wipro also has a profitable presence in niche market segments of Consumer Products, Lighting, Furniture, Eco Energy, Water treatment and Hydraulics. 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. About 57% of the company's revenue came from the US in Q1 2011. 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 Overview
Business and Financial Metrics
First Quarter 2011 Results (ended June 30, 2010)[2]
Wipro reported revenues for the quarter of Rs. 72.36 billion ($1.56 billion), representing an increase of 16% over the same period last year. IT Services Revenue in dollar terms was $1,204 million, a sequential increase of 3.2% and year-over-year increase of 16.6%. Net Income was Rs. 13.19 billion ($284 million), representing an increase of 31% over the same period last year. IT Services added 22 new clients in the quarter. Wipro added 4,854 employees in the current quarter.
Business Segments
IT Services (76.5% of Q1 2011 Revenue)
The IT Services segment provides IT and IT enabled services to customers. Its service offering includes software application development, application maintenance, research and development services for hardware and software design, data center outsourcing services and business process outsourcing services. In certain total outsourcing contracts of the IT Services segment, the Company delivers hardware, software products and other related deliverables.
IT Products (14.4% of Q1 2011 Revenue)
The IT Products segment sells a range of Wipro personal desktop computers, Wipro servers and Wipro notebooks. The Company is also a value added reseller of desktops, servers, notebooks, storage products, networking solutions and packaged software for leading international brands.
Consumer Care & Lighting (9% of Q1 2011 revenue)
The Consumer Care and Lighting segment manufactures, distributes and sells personal care products, baby care products, lighting products and hydrogenated cooking oils in the Indian and Asian markets. The consumer care market includes personal care products, soaps, toiletries, infant care products, modular switch lights and modular office furniture.
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Geography
Wipro generates the vast majority of its revenue from the U.S. and Europe, 57% and 25% respectively.[3] This makes Wipro more vulnerable to shifts in the U.S. and European markets, as well as the global economy.
Acquisitions
On December 9, 2009, Wipro acquired Lornamead FZE and Lornamead Personal Care Private Limited.[4]
Trends and Forces
Maintaining growth difficult in competitive labor market
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%.[5] 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 the long term, wage inflation and the continued depreciation of the dollar, means that outsourcing is less affordable to the U.S. clients.
The chart below shows the rupee-U.S. dollar exchange rate. The number on the y-axis represents the number of rupees in one U.S. dollar. For example, on March 26, 2010, one U.S. dollar was equivalent to 45.13 rupees.
Competitors
Infosys Technologies (INFY): Infosys is a major competitor to Wipro. Infosys had an operating margin of 33.9% compared to Wipro's 22% margin in FY2010. [6]
Tata Consultancy Services (BOM:532540): TCS is a major competitor to Wipro.[7]
Satyam Computer Services (SAY): Satyam is a global IT solutions provider. It had revenues of $2.47 billion in 2010 and an operating margin of 22.9%. [7]
Cognizant Technology Solutions (CTSH): Cognizant provides custom IT consulting and technology services. Cognizant had revenues of $3.49 billion in 2010 and an operating margin of 19.6%. [8]
References
- ↑ Seeking Alpha "The Coming Death of Indian Outsourcing" March 3, 2008
- ↑ Wipro Investor Relations: "Results for the quarter ended June 30, 2010 under IFRS"
- ↑ 3.0 3.1 3.2 Wipro 2009-2010 Annual Report
- ↑ Reuters: Wipro Profile
- ↑ Information from Morningstar
- ↑ page 19
- ↑ 7.0 7.1 Wikinvest Data Central: Wipro Operating Margin
- ↑ Cognizant 2006 Annual Report, pg.1
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