WIT

Wipro Limited Form 6-K Summary

Business Context and Reporting Period

This Form 6-K covers the quarterly period ended September 30, 2005, and the six-month period ended on the same date. Wipro Limited is a leading global provider of IT services, software solutions, and Business Process Outsourcing (BPO) services, headquartered in Bangalore, India. The company also maintains operations in Consumer Care and Lighting. Financial statements are presented in Indian Rupees (Rs.) with convenience translations to U.S. Dollars (US$) at a rate of Rs. 43.94 per $1.00.

Key Financial Metrics (Six Months Ended Sept 30, 2005)

Margins: Gross margin was 33% (down from 35% in the prior period). Operating margin was approximately 20%.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased by 28% (Rs. 10.3 billion) compared to the six months ended September 30, 2004.
  • Global IT Services: Revenue grew 29%, driven by IT Services (30% growth) and BPO Services (19% growth).
  • India & AsiaPac: Revenue grew 29%, with Services up 31% and Products up 25%.
  • Consumer Care: Revenue grew 26%.
• Profitability: Net income increased by 27% to Rs. 8,972 million. Operating income rose 19% to Rs. 9,704 million.
• Margin Compression: Gross profit margins declined across most segments. Global IT Services gross margin fell from 38% to 35%, and BPO Services gross margin dropped significantly from 33% to 22%. This was attributed to wage inflation, lower utilization rates, and unfavorable exchange rates.
• Acquisition: Wipro acquired the remaining 7% stake in Wipro BPO Solutions Limited for Rs. 852 million, making it a wholly-owned subsidiary and recognizing Rs. 304 million in goodwill.
• Stock Dividend: A 1:1 stock dividend was approved and issued in July 2005, increasing the share count. All per-share data has been adjusted retroactively.

Guidance, Outlook, and Risks

• Outlook: Management anticipates continued growth but expects pressure on gross margins due to wage inflation in India, increased competition, and the impact of amortizing stock-based compensation. The company plans to focus on higher-margin services and improving productivity.
• Accounting Changes: Wipro is required to adopt SFAS No. 123(R) regarding share-based payments effective April 1, 2006. Pro-forma disclosure indicates this would have reduced net income by Rs. 346 million for the current period.
• Tax Contingencies: Significant tax disputes remain regarding Section 10A tax holiday benefits. As of September 30, 2005, the net exposure on these demands was Rs. 4,738 million. Management believes it will prevail, but a recent tribunal ruling suggests a potential reduction in the demand by Rs. 2,159 million.
• Foreign Exchange Risk: Approximately 73% of revenue is earned in foreign currencies (primarily USD), while costs are largely in Rupees. Rupee appreciation negatively impacts revenue realization. The company uses forward contracts to hedge exposure.
• Legal Proceedings: A trademark infringement claim was filed in Germany by Wipro Werbeagentur GmbH. Wipro has appealed an ex-parte injunction and believes the allegations are without merit.

Investor Verification Checklist

• Tax Exposure: Verify the status of the Rs. 4.7 billion net tax exposure and the impact of the recent Income Tax Appellate Tribunal ruling on the final liability.
• Margin Trends: Monitor the sustainability of gross margins in the BPO segment, which saw a sharp decline to 22% due to attrition and compensation costs.
• Stock Compensation Impact: Assess the future impact of adopting SFAS 123(R) on reported earnings starting April 2006.
• Client Concentration: Review the top 10 clients, which accounted for 25% of Global IT Services revenue in the period.
• Currency Hedging: Evaluate the effectiveness of the company's hedging strategy given the volatility of the Indian Rupee against the US Dollar.