WIT

Wipro Limited: Form 6-K Summary (Quarter Ended December 31, 2004)

Business Context and Reporting Period

This Form 6-K filing covers the quarter and nine months ended December 31, 2004, for Wipro Limited, an India-based global provider of IT services, software solutions, and business process outsourcing (BPO). The company operates primarily through three segments: Global IT Services and Products, India and AsiaPac IT Services and Products, and Consumer Care and Lighting. Financial statements are prepared under U.S. GAAP and presented in Indian Rupees (Rs.), with U.S. Dollar translations provided for convenience at a rate of Rs. 43.27 per $1.

Key Financial Metrics

Margins: Gross margin for the nine months ended December 31, 2004, was approximately 34.5%. The effective tax rate for the period was 15%.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased by 43% to Rs. 58,395 million compared to Rs. 40,819 million in the prior year period. Global IT Services revenue grew 43%, driven by enterprise services, technology services, and a 65% increase in BPO services.
• Profitability: Net income surged 69% to Rs. 11,360 million. Operating income increased 77% to Rs. 12,878 million.
• Stock Dividend: In June 2004, the company executed a 2-for-1 stock dividend, issuing 465.6 million additional shares. All share and per-share data in this filing are adjusted to reflect this split.
• Acquisition Activity: The company acquired additional shares in Wipro Spectramind, recording Rs. 169 million as goodwill. A loss of Rs. 207 million was recognized on the direct issue of stock by the subsidiary due to option exercises below carrying value.
• Foreign Exchange: The company recorded a net foreign exchange loss of Rs. 287 million for the nine-month period, compared to a gain of Rs. 201 million in the prior year.

Guidance, Outlook, and Risks

Management Commentary: Management attributes growth to increased client acquisition (96 new clients in Global IT Services) and expanded service scope. The company anticipates continued pressure on gross margins due to wage inflation in India, increased onsite service delivery, and the amortization of stock-based compensation.

Accounting Changes: The company notes the upcoming adoption of SFAS No. 123(R) effective July 1, 2005, which requires expensing stock options based on fair value. Pro forma analysis suggests this would have reduced net income by Rs. 996 million for the nine months ended December 31, 2004.

Risks and Contingencies:

• Tax Dispute: A significant tax assessment order from Indian authorities for the fiscal year ended March 31, 2001, demands Rs. 2,614 million regarding Section 10A tax holiday disallowances. Wipro has provided Rs. 300 million and is appealing the remainder, which management believes is without merit.
• Currency Risk: Approximately 73% of revenue is earned in foreign currencies while costs are largely in Rupees. Rupee appreciation poses a risk to margins.
• Client Concentration: The top 10 clients accounted for 29% of Global IT Services revenue in the nine months ended December 31, 2004.
• Immigration: Restrictions on H-1B and L-1 visas in the U.S. could hamper the ability to deploy personnel to client sites.

Investor Verification Checklist

• Tax Liability Exposure: Verify the status of the Rs. 2,614 million tax assessment appeal and the adequacy of the Rs. 300 million provision.
• Stock Compensation Impact: Assess the potential reduction in future earnings upon the mandatory adoption of SFAS 123(R) in fiscal 2006.
• Currency Hedging: Review the effectiveness of forward contracts (Rs. 873 million USD equivalent outstanding) in mitigating Rupee appreciation risks.
• Client Concentration: Monitor revenue dependency on the top 10 clients, which represent nearly 30% of the core IT segment.
• Working Capital Trends: Analyze the increase in accounts receivable (up to Rs. 13,143 million) relative to revenue growth to ensure collection efficiency.