WIT

Wipro Limited Form 6-K Summary: Quarter Ended June 30, 2004

Business Context and Reporting Period

This Form 6-K reports the unaudited financial results for Wipro Limited, an India-based global provider of IT services, products, and business process outsourcing (BPO), for the quarter ended June 30, 2004. 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 in accordance with U.S. GAAP and presented in Indian Rupees (Rs.), with U.S. Dollar translations provided for convenience at a rate of Rs. 45.99 per $1.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 51% year-over-year, driven by a 47% increase in Global IT Services (Rs. 13.5 billion), a 94% increase in India/AsiaPac IT Services (Rs. 2.6 billion), and a 31% increase in Consumer Care (Rs. 1.0 billion).
• Operating Income: Operating income rose 75% to Rs. 3.58 billion. The Global IT segment contributed 93% of total operating income.
• Foreign Exchange Impact: The company recorded a net foreign exchange loss of Rs. 468 million in operating expenses, compared to a gain of Rs. 50 million in the prior year. This was partially offset by hedging strategies where unrealized losses of Rs. 1.99 billion were recorded in accumulated other comprehensive income.
• Dividends: The company paid cash dividends of Rs. 7.58 billion during the quarter, compared to no dividends paid in the prior year quarter.
• Stock Dividend: A 2-for-1 stock dividend was approved and issued in June 2004, increasing the share count by 465.6 million shares. All per-share data has been retroactively adjusted.

Guidance, Outlook, and Risks

• Outlook: Management anticipates continued growth but notes pressure on gross margins due to wage inflation in India, increased competition, and the rising proportion of services performed at client sites (onsite) versus offshore. The company expects to sustain profitability by focusing on higher-margin services and improving employee productivity.
• Tax Contingency: A significant legal proceeding involves an Indian tax assessment order disallowing a tax deduction under Section 10A of the Income Tax Act. The authorities demand Rs. 2.61 billion (approx. $57 million). Wipro has accrued a provision of Rs. 300 million ($6.5 million) and believes the remainder of the claim is without merit, having filed an appeal.
• Market Risks: Key risks include the appreciation of the Indian Rupee against major currencies (which reduces revenue realization), potential restrictions on H-1B visas affecting U.S. operations, and the expiration of tax holidays for software technology parks by 2009.
• Unusual Items: In Q2 2003, a loss of Rs. 176 million was recorded due to the direct issue of stock by a subsidiary (Wipro Spectramind). No such loss occurred in Q2 2004.

Investor Verification Checklist

• Tax Dispute Resolution: Verify the status of the Rs. 2.61 billion tax assessment appeal and the adequacy of the Rs. 300 million provision.
• Currency Hedging Effectiveness: Review the impact of the Rs. 1.99 billion unrealized loss on derivatives in equity and the potential for future volatility in earnings due to Rupee appreciation.
• Client Concentration: Confirm that the top 10 clients (accounting for 31% of Global IT revenue) remain stable, as the loss of a major client could materially impact results.
• Wage Inflation Trends: Monitor the impact of rising compensation costs in India on the Global IT Services gross margin, which is the primary profit driver.
• Visa Regulations: Assess the impact of U.S. immigration restrictions (H-1B caps) on the company's ability to deploy staff to U.S. client sites.