Business Context and Reporting Period
Company: Wipro Limited (Wipro)
Filing Type: Annual Report on Form 20-F
Reporting Period: Fiscal year ended March 31, 2006
Business Overview: Wipro is a leading global IT services company headquartered in Bangalore, India. Its primary operations include Global IT Services and Products (IT Services and BPO), India and AsiaPac IT Services and Products, and Consumer Care and Lighting. The company utilizes a global delivery model with significant offshore development centers in India.
Key Financial Metrics (Fiscal Year Ended March 31, 2006)
| Metric | 2006 (Rs. Millions) | 2006 (US$ Millions) | 2005 (Rs. Millions) |
|---|---|---|---|
| Total Revenues | 106,107 | 2,385 | 81,353 |
| Gross Profit | 34,460 | 775 | 27,498 |
| Gross Margin | 32.5% | - | 33.8% |
| Operating Income | 21,972 | 494 | 17,857 |
| Net Income | 20,270 | 456 | 15,833 |
| Earnings Per Share (Basic) | Rs. 14.41 | $0.32 | Rs. 11.38 |
| Cash and Cash Equivalents | 8,858 | 199 | 5,671 |
| Investments (Liquid/Short-term) | 30,328 | 682 | 22,958 |
| Total Debt | 705 | 16 | 564 |
| Stockholders' Equity | 78,764 | 1,771 | 56,729 |
Note: US$ translations are based on the exchange rate of Rs. 44.48 per $1.00 as of March 31, 2006.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased by 30% (Rs. 24.7 billion) compared to the prior year, driven by 34% growth in IT Services and Products and 19% growth in BPO Services.
- Profitability: Net income rose 28% to Rs. 20.27 billion. However, gross margins declined slightly from 34% to 33% due to increased compensation costs, amortization of deferred stock compensation, and the impact of new acquisitions with lower initial margins.
- Acquisitions: Significant strategic acquisitions were completed in late 2005 and early 2006, including mPower Software Services (payments processing), NewLogic Technologies (system-on-chip design), cMango (Business Service Management), Quantech (CAD/Engineering), and Enabler (retail solutions). These contributed to revenue growth and goodwill increases.
- Segment Performance: Global IT Services and Products accounted for 76% of total revenue and 88% of operating income. The India and AsiaPac segment saw a 45% increase in operating income.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management anticipates continued growth in IT Services and BPO but warns of challenges in sustaining historical profitability levels due to increasing competition, pricing pressures, and rising wage costs in India. The company plans to finance future operations and expansions primarily through internal cash flows.
Key Risks
- Currency Fluctuation: Approximately 79% of revenues are earned in foreign currencies while costs are largely in Indian Rupees. Appreciation of the Rupee negatively impacts revenue and margins.
- Tax Incentives: The company benefits significantly from Indian tax holidays and export deductions. Expiration of these incentives (phased out by 2009) will increase future tax liabilities. Additionally, the company faces ongoing tax disputes regarding Section 10A deductions, with a net exposure of approximately Rs. 2.4 billion as of March 31, 2006.
- Immigration: Restrictions on H-1B and L-1 visas in the United States could hamper the company's ability to deploy personnel to client sites.
- Client Concentration: The top 10 clients accounted for 27% of Global IT Services revenue in 2006.
Unusual Items
- Stock Dividends: The company executed a 1:1 stock dividend in July 2005, adjusting share counts and per-share data for all reported periods.
- Accounting Changes: The company is required to adopt SFAS No. 123R (Share-Based Payment) effective April 1, 2006, which will require expensing stock options based on fair value, expected to reduce reported net income.
Investor Verification Checklist
- Tax Dispute Resolution: Verify the status of the ongoing Indian income tax appeals regarding Section 10A deductions, which represent a material contingent liability.
- Stock-Based Compensation Impact: Assess the projected impact of the upcoming SFAS 123R adoption on future earnings per share.
- Acquisition Integration: Monitor the integration and performance of recent acquisitions (mPower, NewLogic, cMango, etc.) to ensure they meet earn-out targets and margin expectations.
- Currency Hedging: Review the effectiveness of the company's hedging strategy against Rupee appreciation, given the high exposure to foreign currency revenue.
- Wage Inflation: Track trends in employee compensation costs in India relative to revenue growth to assess margin sustainability.