Wipro is expected to share in the IT sector's revival. Buy on corrections
03-Feb-2011 •Shoaib Zaman
Wipro Ltd is one of India’s largest information technology (IT) players. In addition to being a major IT company, it is also a conglomerate with interests in businesses such as personal care products, soaps, toiletries, switch lights and modular office furniture. It also sells hydraulic cylinders and truck tipping systems that are used in a variety of earth moving, material handling, mining and construction equipment. IT and IT-related businesses are Wipro’s mainstay, contributing three-fourth of its total revenue.
Global reach: Wipro is present in most major IT markets of the world. In several overseas markets the company has developed a strong presence by acquiring local players.
Bouquet of services: The company is present in many segments of the IT business. This gives it the ability to engage an existing client by providing it a variety of services.
Client mining: The company’s anaemic client mining woes continue. Though Wipro has a similar number of clients who are worth more than $20 million as Infosys, it has only two $100 million clients compared to Infosys’s 10.
Slow at hiring: While TCS and Infosys continued to hire during the second quarter of FY11, Wipro went slow on hiring. In Q2 the company hired only 2,975 employees while its peers added 5,000-10,000 personnel. This strategy of slow hiring helped improve its margins during the slowdown in 2008 and 2009. However, the move backfired when volume momentum revived.
Protectionist measures: Fears of major markets such as the US adopting protectionist policies have increased after the state of Ohio passed legislation banning outsourcing from the state. To counter such threats, Wipro plans to increase the strength of its local staff in overseas offices from 36 per cent currently to 50-60 per cent.
Cost of human capital: Wipro’s reported attrition rate is around 20 per cent. Though high, this is not too much of a deviation from industry standards.
Fragile global recovery and rupee appreciation: The fragile global economic recovery poses a threat not just to Wipro but to the entire Indian IT industry. While demand from companies in the developed world has been improving, any significant shock to the global economy (say, in the form of a sovereign default in Europe or from some other source) could cloud the overall outlook for business and affect the IT industry’s prospects. Appreciation of the rupee is another cause for concern for this industry.
Discretionary spending has revived in the developed world and Wipro has benefited from this development. The company’s management believes that it can in future hike its rates and thereby expand its margins.
The company was trading at a price-to-earning (PE) ratio of 21.96 on December 2, 2010. This is only slightly lower than its five-year median PE of 22.25. Over the last five years the company’s earnings per share has grown at a compounded annual rate of 22.51 per cent. This gives it a PEG of 0.98. The company is not trading at a significant discount at present. In order to enhance your margin of safety, buy this stock only when prices dip.