Stock Review: Wipro

THE leadership overhaul in Wipro comes at a time when the performance during the past four quarters of India's third-largest IT exporter has lagged behind its bigger peers — TCS and Infosys.

   The improved global IT demand is yet to reflect in Wipro's trailing
four-quarter incremental operating profit. It fell by 21% YoY against the sharp growth reported by TCS and Infosys. For the new management led by TK Kurien, it is clear that the top priority will be enhancing the nature of engagements with its larger clients and on strengthening its presence in the banking and finance domain.

   Wipro's top 10 clients account for just over 19% of total revenue, compared with 25-30% for both TCS and Infosys. They have also added three and five clients respectively in the $100-million billing category. Wipro has only one such client.

   In the past six quarters, growth in the Banking and Financial Services, or BFSI, segment has outpaced other verticals due to the recovery in the financial sector in the West after the subprime crisis of 2008. Wipro, on the other hand, has traditionally focused more on embedded technology and communications domains, which are yet to see a revival. This is another reason why Wipro has not been able to take full advantage of the revival in outsourcing demand.

   But improving the BFSI play is easier said than done, since most of the other top IT companies enjoy a strong presence in the vertical. For instance, TCS grosses nearly half of its revenue from clients in this segment.

   Mr Kurien will also have to address issues pertaining to the declining quality of profit. Though the number of days Wipro takes to collect outstanding sales (receivable days) is not higher than its peers, the proportion of receivables in its net profit is rising.

   In the past, Wipro tried to create a business model, which would ensure growth without a proportionate increase in its headcount. But this nonlinearity has so far eluded the company. The fallout is that even though demand has picked up, its employee addition remained lower than its peers in the past four quarters. Mr Kurien will have to make a tough choice between the headcount driven growth and nonlinear approach, which would demand a higher intellectual property component.

   While the challenges are too many, Mr Kurien can employ Wipro's few unique strengths. In the past, Wipro has successfully traversed inorganic growth strategy across verticals. Its experience in integrating external capabilities can be utilised to enhance its BFSI skills through acquisitions. In that, Wipro's cash balance of . 2,600 crore could come in handy.

   Wipro also enjoys exposure to the fastgrowing domestic IT market unlike some of its peers. Wipro's stock has underperformed its peers and the sector indices over the past year. For investors, it could be a long wait before they can see a major turnaround since Wipro is expected to lag behind the average industry growth in the next two quarters.