Business Context and Reporting Period
Company: Wipro Limited (Wipro)
Filing Type: Annual Report on Form 20-F
Reporting Period: Fiscal year ended March 31, 2009
Accounting Basis: U.S. GAAP (presented in Indian Rupees with USD translation)
Overview: Wipro is a leading global provider of Information Technology (IT) services, IT products, and business process outsourcing (BPO). The company also maintains operations in Consumer Care and Lighting, and Infrastructure Engineering. The fiscal year 2009 was marked by a global economic slowdown, yet Wipro reported growth in revenue and operating income, driven primarily by its IT Services segment.
Key Financial Metrics
| Metric (in millions) | Fiscal 2009 | Fiscal 2008 | Change |
|---|---|---|---|
| Total Revenue | Rs. 254,564 ($5,004) | Rs. 197,428 | +29% |
| Operating Income | Rs. 41,390 ($814) | Rs. 33,714 | +23% |
| Net Income | Rs. 34,415 ($677) | Rs. 32,241 | +7% |
| Earnings Per Share (Diluted) | Rs. 23.63 ($0.46) | Rs. 22.16 | +6.6% |
| Operating Margin | 16.26% | 17.08% | -82 bps |
| Cash & Cash Equivalents | Rs. 49,117 ($966) | Rs. 39,270 | +25% |
| Total Debt | Rs. 55,388 ($1,089) | Rs. 43,732 | +27% |
| Working Capital | Rs. 52,154 ($1,025) | Rs. 53,643 | -3% |
Note: USD figures are convenience translations based on the exchange rate of Rs. 50.87 per $1.00 as of March 31, 2009.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased by 29% to Rs. 254.6 billion. This was driven by a 31% increase in IT Services revenue, a 36% increase in IT Products, and a 32% increase in Consumer Care and Lighting. The "Others" segment declined by 10% due to a slowdown in global infrastructure engineering markets.
- Profitability Pressure: While operating income grew by 23%, the operating margin compressed by 82 basis points to 16.26%. This was attributed to increased personnel costs, higher provisions for doubtful debts (due to a major customer filing for bankruptcy protection), and increased amortization of intangible assets from recent acquisitions (Infocrossing and Unza).
- Non-GAAP Adjustments: Management reported an adjusted non-GAAP net income of Rs. 37.7 billion (up 17% YoY), excluding the impact of foreign currency translation losses on debt and stock-related fringe benefit taxes. GAAP net income was impacted by a Rs. 3.97 billion loss related to the restatement of foreign currency debt and cross-currency interest rate swaps.
- Acquisitions: In January 2009, Wipro acquired Citi Technology Services Limited (WTS) for Rs. 6.2 billion to strengthen its Technology Infrastructure Services capabilities. Previous acquisitions of Infocrossing and Unza continued to contribute to revenue and amortization expenses.
Guidance, Outlook, and Risks
Management Commentary & Outlook: Management anticipates continued challenges due to the global economic slowdown, particularly in the U.S. and Europe, which account for approximately 86% of IT Services revenue. Clients may reduce or postpone IT spending. To mitigate this, Wipro is focusing on the "PACE" (Performance And Capital Efficiency) program to reduce client IT spends, strengthening its delivery model, and driving higher employee productivity. The company expects to finance expansion and acquisitions through operating cash flows and existing cash reserves.
Key Risks & Contingencies:
- Foreign Exchange: Significant exposure to currency fluctuations. Appreciation of the Indian Rupee against the U.S. Dollar and Euro adversely affects revenue realization and gross margins. Conversely, depreciation increases the rupee value of foreign currency debt.
- Taxation: The company benefits from tax holidays in Software Technology Parks and Special Economic Zones, which are subject to expiration or modification by the Indian government. There are ongoing tax disputes regarding Section 10A deductions and Minimum Alternate Tax (MAT) liabilities.
- Client Concentration: The top 10 clients accounted for 20% of IT Services revenue in 2009. Loss of a major client could materially impact results.
- World Bank Status: In January 2009, the World Bank determined Wipro ineligible for direct contracts for 2007-2011. While revenue impact is deemed insignificant, management notes potential reputational risks.
- Immigration: Restrictions on U.S. H-1B and L-1 visas could hamper the ability to deploy personnel to U.S. clients.
Investor Verification Checklist
- Currency Impact: Verify the sensitivity of future earnings to Indian Rupee appreciation, given that a significant portion of revenue is in foreign currencies while costs are in Rupees.
- Tax Holiday Expiry: Monitor the status of tax holidays for Software Technology Parks (extended to FY2010) and Special Economic Zones, as their expiration will increase the effective tax rate.
- Debt Structure: Review the composition of foreign currency debt (primarily Japanese Yen) and the effectiveness of hedging strategies (cross-currency swaps) in mitigating translation losses.
- Client Concentration: Assess the stability of the top 10 clients, particularly in the financial services sector, which is heavily exposed to the global credit crisis.
- Acquisition Integration: Evaluate the integration progress and return on investment for recent acquisitions (Infocrossing, Unza, and Citi Technology Services) and the associated amortization of intangible assets.