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Wipro (WIT) has spun off everything but the IT-services and IT-products division. The spin-off is effective from April 1 2013 going forward. Currently Wipro trades at a forward P/E of 16, which is 6-7 below the industry standard.

Once the market realizes part of Wipro's growth is already realized with the new clients they contracted, and the slimmed down business is growing at a new faster rate, (because of the divestiture of the slower growing consumer product business) I can see the shares gaining ground and trading at more typical levels.

Wipro was founded in 1945 and has grown to become one of the world's largest IT services providers. They provide software and services to a multinational client base. They also have an IT product division which constitutes a much smaller portion of revenue, (about 15%) which sells a range of desktop computers, servers, and notebooks.

They used to have a consumer-care and lighting segment, that manufactured and sold products such as soaps, cooking oils, and lighting products in Indian and Asian markets.

These are the details of the spin off as they were reported in the India Times:

JM Financial and Citigroup were advisers to Wipro on the demerger. Under the demerger plan, Wipro shareholders have three options. They can receive one equity share with face value of Rs10 in Wipro Enterprises for every five equity shares of Rs 2 each in Wipro that they hold; or receive one 7% redeemable preference share in Wipro Enterprises, with face value of Rs 50, for every five equity shares of Wipro that they hold; or exchange the equity shares of Wipro Enterprises and receive as consideration equity shares of Wipro held by the promoter. The exchange ratio will be 1 equity share in Wipro for every 1.65 shares in Wipro Enterprises.

Favorable circumstances:

  • Wipro enjoys recurring revenue from 95% of its client base (according to Morningstar). The company continuously focuses on enhancing its client relationships, giving it substantial recurring revenue opportunities.
  • They have 900 established clients. In the latest filing they reported acquiring 52 new clients. I'll provide more details below.
  • Wipro has solid cash flows with very little need to reinvest, especially since the spin-off.
  • They used to be reliant on the telecom sector, but made a push to diversify, and now the core of their services is concentrated around the financial service sector, energy, retail and health care.
  • Wipro is headed by chairman Azim Premji and CEO T.K. Kurien. Premji controls 75% of the shares, which I think is not ideal. At least Premji's goals will be aligned with shareholders though. The company has won awards for shareholder friendliness.
  • Offshore services is a growth market. Wipro is now focused solely on this industry. Going forward, they might grow at a faster rate than the average yearly EPS growth of 13.5% they realized over the last five years.
  • They have about 1.5 billion of cash on their balance sheet.
  • Wipro acquired 52 new clients over Q1 2013. They provide details of what are most likely the 3 largest clients.

Wipro Announced New Clients

Wipro has secured a contract from a large Europe-based universal bank to build a "Centralized Testing Unit" that will help the bank achieve higher production stability and lower cost of avoidance in its Testing processes. Wipro's Transformation Services and Data Obfuscation Services along with industry leading testing services will help the bank achieve standardized Testing processes across the organization.

GVK-led Mumbai International Airport Pvt. Ltd. [MIAL], the operator of the Chhatrapati Shivaji International Airport [CSIA] in Mumbai has chosen Wipro to provide world-class IT services for the new integrated terminal "T2". Wipro will be responsible for providing Managed Services across the entire IT landscape at MIAL and deliver high availability and operational efficiency across all the critical airport processes.

Wipro has won an ERP deal for Asset and Infrastructure Management from a key national defense organization.

The deals were released to the press by the company.

Risks

A few of the risks and uncertainties that Wipro faces:

  • Rising wages and a high turnover of employees (this number is going down though)
  • Price pressure from competitors like Infosys (INFY) and Cognizant (CTSH).
  • Worldwide Economic slowdown. A significant portion of revenue is coming from Europe, and this can slow down the number of new contracts.

Valuation

The company is trading at a forward P/E of roughly 16. Not a true bargain, but 1.5 billion on the balance sheet and an estimated double digit growth rate going forward goes a long way. I particularly like that some of that growth has been realized already given the new clients they acquired.

The industry average is at a forward P/E of 22,6. Perhaps this gap can be closed, now the company is a true IT service provider instead of a mixed bag of businesses. In addition they are less reliant on the telecom sector, with a client base that is more diversified across sectors.

Source: Wipro's Spin-Off Enough To Close Industry P/E Gap