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Wipro commands a premium valuation to the overall industry price to earning ratio due to superior business mix, excellent long term client relationships, clear growth driven strategy, transparent and conservative accounting policies coupled with professional depth and quality management.
Historically, the one year forward PE of Wipro has been quoting at a premium in the range of 20-25 per cent to that of Infosys'. The premium we think is essentially due to: one, its limited liquidity with the promoter's holding of about 76 per cent of the total market capitalisation; two, the expectation of growth much higher than that of the overall Indian software industry as the software business of Wipro assumes new significance and increased focus to stress on brand building.
The company's recent decision of stock split i.e., to reduce the par value of shares from Rs 10 per share to Rs 2 per share is expected to improve liquidity. The current market price of Wipro discounts our estimated EPS for fiscal 2000 andfiscal 2001 by about 62 and 38 times, respectively. Our one year price target is Rs 6200.
Wipro is a multi-product company with a diverse business profile. Some 22 per cent of the total turnover comes from software exports but contributes about 62 per cent to the total PBDIT. The operating margin (OPM) of the software business is 32 per cent against the whole company's OPM of some 14 per cent. Wipro is the second largest software company in the country.
Besides computer hardware, where it is an old and established player, it has interests in other unrelated businesses like lighting, soaps and baby-care products and vanaspati. Wipro's software exports business is grouped into three divisions -- `Enterprise Solutions' sharing 60 per cent of this division's revenues, `Technology solutions' some 35 per cent and ERP accounting for some 5 per cent of the software division's turnover.
Ecommerce/internet, the third division of software service, contributed about five per cent to the turnover in fiscal 1998.Wipro would here focus on World Wide Web and Electronic commerce solutions and services with particular emphasis on `Business to business solutions', in the area of finance and banking only. Internet banking, internet securities trading, EDI, transaction security and payments, etc., would be part of these services. This division has a long way to go as Wipro is yet to make its presence felt in the front end application segment.
Wipro's exclusive development centres account for more than 65 per cent of the total manpower strength as of today for companies like Lucent Technologies, Tandem computers, Seagate, Sequent and VLSI technologies.
One of the most prominent strategic initiatives taken by the management is setting a mission for itself to benchmark `Six Sigma Quality' which means a process excellence that yields only 3.4 defects in a million opportunities to make a defect. We feel that this is one of the most important steps as this should enable Wipro to benchmark the competitive billing rates on thebasis of the best quality and value services. The strategy of Wipro in the following years is based on the fact that about 70 per cent of the staff would concentrate on the existing business while 30 per cent will concentrate on generating and extending domain expertise to generate new accounts, value added extensions with existing clients and thereby generate fresh revenues.
Target for Wipro would be to generate 50 per cent of the turnover from high end project analysis, design and consulting in the coming years like some recent full cycle projects being completed for clients like Bytel, UK and Allied Systems.
Wipro does not depend on intermediaries for bagging projects overseas and has managed to rake in about 90 per cent of its business on its own. Currently, around 55 per cent of Wipro's work is carried out offshore. The company plans to gradually increase the proportion of projects done offshore to about 80 per cent.
Wipro has always emphasised on products development and has spent about Rs 285million in fiscal 1998. It has developed products like Softchips, helpdesk related products in healthcare and telecom and a network management kit `Cybermanage' manage Java products. Softchips alone is expected to contribute almost Rs 200 million to the turnover in fiscal 1999.
Net profit grew by 58 per cent in FY99 to Rs 1.7 billion from Rs 1.08 billion in the previous year. We estimate PAT to grow by an average sixty five plus per cent to Rs 2.9 billion and Rs 4.8 billion by FY2000 and FY2001 respectively. We expect net profit margins to double by the next two years based on stronger operating margins and lesser interest outflow due to reducing interest burden.
The company is planning a capex of around Rs 2.5 billion over the next two years. It is setting up a new software development centres in Bangalore, Chennai and Hyderabad. Around 70-80 per cent of this will be expended on building software related infrastructure. The company is expected to follow a very conservative accounting policy.
Wipro hasa subsidiary in the US whose focus is on healthcare with an initial investment of $ one million . It has set up another subsidiary in the US, EnThink Inc. This subsidiary, part of the Technology Solutions group, will focus on development products to be used in chip design. Wipro is one of the earliest entrants into the Japanese market with it setting up a Japanese Information Processing Centre as early as in 1995. Wipro is also looking to open a subsidiary in Europe which will essentially focus on the internet and Euro projects.
Excerpts from research report of Triumph International Finance India Ltd
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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