WIT

Business Context and Reporting Period

Company: Wipro Limited (Wipro)
Filing Type: Annual Report on Form 20-F
Reporting Period: Fiscal year ended March 31, 2010
Accounting Standards: International Financial Reporting Standards (IFRS) – First year of adoption.
Business Overview: Wipro is a leading global IT services company headquartered in Bangalore, India. Its primary segments include IT Services (75% of revenue), IT Products (14%), Consumer Care and Lighting (8%), and Others (3%). The company operates globally with significant revenue derived from the United States (44%) and Europe (21%).

Key Financial Metrics (Fiscal Year 2010)

Note: US$ translations are based on the exchange rate of Rs. 44.95 per $1.00 as of March 31, 2010.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased by 6.23% (Rs. 15,066 million) compared to the prior year. Growth was driven by a 17% increase in Consumer Care and Lighting, 11% in IT Products, and 6% in IT Services. The "Others" segment declined by 22% due to a global slowdown in infrastructure engineering.
• Profitability: Operating income rose by 18.96% to Rs. 51,511 million. Profit attributable to equity holders increased by 18.50% to Rs. 45,931 million.
• Margins: Gross margin improved by 190 basis points to 31.32%. Operating margin expanded by 203 basis points to 18.99%.
• Segment Performance:
  • IT Services: Revenue grew 5.68% (Rs. 10,877 million). Operating income increased 17.94%. Gross margin improved by 179 bps to 34.74% due to better utilization rates (71.5% vs 69.1%) and improved USD/INR realization.
  • IT Products: Revenue grew 11.46% driven by demand in India and the Middle East. Operating income surged 29.42%.
  • Consumer Care and Lighting: Revenue grew 17.33% due to strong performance in Indian and South-East Asian markets and the acquisition of Yardley. Operating income increased 18.83%.
• Finance Costs: Finance expenses declined significantly from Rs. 3,824 million to Rs. 991 million, primarily due to lower interest rates on borrowings.
• Taxation: Income tax expense increased to Rs. 9,294 million (from Rs. 6,035 million) as the effective tax rate rose to 16.9% (from 12.6%) due to a higher proportion of income subject to taxation.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

• Market Conditions: Management notes that while the global economic environment has improved since the first half of 2010, pricing remains competitive and clients remain focused on cost reduction.
• Strategy: The company is investing in new technology areas (cloud, mobility, analytics) and deepening domain expertise. It aims to sustain growth in operating income and cash flow from traditional businesses while expanding in emerging growth areas.
• Dividends: A final cash dividend of Rs. 6 per share was proposed and approved, totaling approximately Rs. 10,070 million. A stock dividend (2 for 3) was also approved and allotted.

Risks and Contingencies

• Internal Control Investigation (Material Weaknesses Remediated):
  • The company discovered acts of embezzlement by a junior employee between November 2006 and December 2009. An Audit Committee investigation concluded the amounts were not material and substantially recovered.
  • Investigation revealed accounting misstatements related to exchange rate fluctuations and outstanding liabilities. Management concluded these were not material individually or in aggregate. If corrected, 2010 profit before tax would have been 1.0% higher.
  • Material weaknesses in internal controls (password sharing, lack of maker-checker controls) identified as of March 31, 2009, were remediated by March 31, 2010. The independent auditor issued an unqualified opinion on internal controls as of March 31, 2010.
• Foreign Exchange Risk: A significant portion of revenue is in foreign currencies (USD, Euro, GBP) while costs are in Indian Rupees. Appreciation of the Rupee adversely affects margins. The company uses derivatives to hedge exposure.
• Taxation Risks: The company faces ongoing tax disputes with Indian authorities regarding deductions under Section 10A of the Income Tax Act. Demands aggregating to Rs. 11,127 million (for years 2001-2004) were largely dismissed by appellate authorities, but further appeals are pending. New demands for 2005 and 2006 are also under appeal. Management believes the outcome will be favorable.
• Client Concentration: The largest client accounted for 3% of IT Services revenue; the top 10 clients accounted for 20%. Loss of a major client could impact revenue.
• Immigration: Restrictions on H-1B and L-1 visas in the U.S. could hamper the ability to provide services to U.S. clients.

Important Facts for Investor Verification

• IFRS Transition: Verify the impact of the transition from Indian GAAP/US GAAP to IFRS on financial statement comparability, particularly regarding revenue recognition and stock-based compensation amortization.
• Internal Control Remediation: Confirm the effectiveness of the new internal controls implemented to address the embezzlement and accounting misstatements identified in the prior year.
• Tax Disputes: Monitor the status of ongoing tax appeals with Indian authorities, as an unfavorable resolution could materially impact future tax liabilities and profitability.
• Currency Exposure: Assess the impact of Indian Rupee appreciation against the US Dollar on future gross margins, given the company's cost structure.
• Acquisition Integration: Review the integration progress and performance of recent acquisitions, specifically Lornamead (Yardley) and Citi Technology Services.