WIT

Wipro Limited: Form 20-F Summary (Fiscal Year Ended March 31, 2014)

Business Context and Reporting Period

This filing covers the fiscal year ended March 31, 2014. Wipro Limited is a leading global provider of information technology (IT) services, business process outsourcing (BPO), and IT products. Effective March 31, 2013, the company completed the demerger of its non-IT "Diversified Business" (consumer care, lighting, infrastructure) into Wipro Enterprises Limited. Consequently, the Diversified Business is presented as a discontinued operation. The company operates primarily through two continuing segments: IT Services (91.1% of revenue) and IT Products (8.9% of revenue). Starting in the quarter ended June 30, 2013, IT Services were reorganized into six industry-based segments: Banking, Financial Services and Insurance (BFSI); Healthcare and Life Sciences (HLS); Retail, Consumer Goods, Transport and Government (RCTG); Energy, Natural Resources and Utilities (ENU); Manufacturing and High-Tech (MFG); and Global Media and Telecom (GMT).

Key Financial Metrics

Note: Revenue figures exclude foreign exchange gains/losses included in segment reporting. FY 2014 revenue translated to approximately US$7,238 million at the rate of Rs. 60.00/US$1.00.

Material Changes vs. Prior Period

• Revenue Growth: Revenue from continuing operations increased by 16.12% year-over-year, driven primarily by an 18.05% increase in IT Services revenue. This growth was partially offset by a 1.15% decline in IT Products revenue following the cessation of manufacturing "Wipro" branded desktops, laptops, and servers in Q4 2013.
• Margin Expansion: Operating margin improved by 185 basis points to 20.42%. Gross margin expanded by 164 basis points to 32.48%, largely due to the depreciation of the Indian rupee against the US dollar, which boosted revenue realization. This was partially offset by rising employee compensation costs.
• Profitability: Profit attributable to equity holders rose by 27.06% to Rs. 77,967 million. The increase was driven by higher operating income and increased finance and other income (Rs. 14,542 million vs. Rs. 11,317 million in FY 2013), despite a rise in income tax expense.
• Cost Structure: Cost of revenues increased by 13.36% in absolute terms, primarily due to higher employee compensation (driven by rupee depreciation, salary increases, and headcount growth) and increased subcontracting fees. Selling and marketing expenses rose 20.79%, while General and Administrative (G&A) expenses grew only 6.84%.
• Segment Performance: The IT Services segment saw growth across all verticals, with notable performance in Energy, Natural Resources and Utilities (ENU) and Healthcare and Life Sciences (HLS). The IT Products segment operating income declined significantly (68.69%) due to the cessation of hardware manufacturing and a non-recurring expense of Rs. 209 million.

Guidance, Outlook, Risks, and Contingencies

• Outlook: Management anticipates continued growth but notes challenges in significantly improving gross profits due to limited pricing power, rising salary costs, and exchange rate fluctuations. The company is focusing on cost containment, automation, and increasing employee utilization.
• Dividends: The Board proposed a final cash dividend of Rs. 5 per share (US$0.08), subject to shareholder approval. This would result in a cash outflow of approximately Rs. 14,427 million including tax.
• Key Risks:
  • Currency Fluctuation: A significant portion of revenue is in foreign currencies (USD, EUR, GBP) while costs are in INR. Appreciation of the rupee adversely affects margins.
  • Client Concentration: The top 10 clients accounted for 23% of IT Services revenue in FY 2014. The loss of a major client could materially impact results.
  • Immigration: Restrictions on H-1B and L-1 visas in the U.S. could hamper the ability to deploy personnel to client sites.
  • SEC Investigation: The SEC has issued a formal order directing a private investigation regarding auditor independence and accounting entries related to exchange rate fluctuations and outstanding liability accounts. The outcome is uncertain but management expects no material adverse effect.
  • Tax Disputes: The company faces significant tax demands (approx. Rs. 42,883 million) regarding deductions under Section 10A of the Income Tax Act. Management expects to prevail based on prior appellate rulings.
• Acquisitions: In January 2014, Wipro acquired Opus CMC, a US-based provider of mortgage due diligence services, for approximately US$75 million (including earn-outs), strengthening its mortgage solutions portfolio.

Important Facts for Investor Verification

• Discontinued Operations: Verify that financial comparisons exclude the "Diversified Business" (consumer care, lighting, infrastructure) which was demerged in March 2013.
• Segment Reporting Change: Note that segment data for FY 2014 is presented on a new industry-based structure (BFSI, HLS, etc.) and is not directly comparable to prior years on a segment-by-segment basis.
• Hardware Cessation: Confirm the impact of stopping the manufacturing of Wipro-branded hardware on the IT Products segment's revenue and operating income.
• SEC Investigation Status: Monitor updates regarding the SEC's private investigation into accounting entries and auditor independence.
• Tax Holiday Expiry: Review the timeline for the expiration of tax holidays for Special Economic Zone (SEZ) units, which currently extend through fiscal year 2028, and the impact of Minimum Alternate Tax (MAT).
• Currency Sensitivity: Assess the sensitivity of future earnings to the INR/USD exchange rate, given the company's revenue/cost currency mismatch.