Wipro: A Logical move

With NewLogic, Wipro will get access to new customers and talent pool

Wipro's edge vis-à-vis its competitors has always been its strengths in the high-end research and development (R&D) services space, particularly in the telecom segment.

So the acquisition of Austria's NewLogic, which focuses on BlueTooth, WirelessLan and radio frequency technologies for the telecom, semi-conductor and consumer electronics sectors is a great fit as Wipro will be able to provide customers with a wider range of services. Not surprisingly, the stock was up 2 per cent in Tuesday's trade at Rs 466.

Wipro will pay around $56 million for the $17 million firm, which brings to the table some marquee customers including the likes of Philips, Infineon, Agere, IBM and Yamaha.

Some of these relationships, like Infineon and Philips complement Wipro's clientele which comprises names such as Cisco, Nortel and Lucent.

So, the new roster of clients provides Wipro an opportunity to cross-sell services. Also, NewLogic has filed for 25 patents, which would deepen Wipro's portfolio.

Wipro can also draw on the talent pool at NewLogic. With a presence in Austria, Wipro can explore options in Eastern Europe, which has several small companies, focussing on the R&D space.

What could drive further efficiencies at New Logic is a new delivery structure and of course, lower costs. The company, which has been growing its revenues at around 20-25 per cent in the past few years, has some exposure in France and Germany which should give Wipro a larger geography to access, though not of any great magnitude.

The buyout is quite small and it will not have any material impact on Wipro's financials in the near term. NewLogic could make some losses in the first six months due to amortisation of some of the intangibles.

However, its operating margins are likely to improve significantly thereafter, as the patents will be monetised. At the current price of Rs 466, Wipro trades at nearly 27 times estimated FY07 earnings.

Steel prices: Pressure points

Domestic steel prices could once again come under pressure and that's largely due to Korea-based Posco, announcing that it would cut prices in 13 steel products, including cold-rolled steel plates and hot-rolled coil products, by 4 to 17 per cent in 2006.

Inevitably, the reduction in steel prices is due to enhanced output in China "" steel production in that country is expected to reach almost 490 million tonne at the end of CY05 as compared to about 419 million tonne in the previous year.

This latest price cut resulted in Indian steel stocks showing signs of weakness on Tuesday "" Tata Steel fell 1.5 per cent to Rs 374, while Essar Steel fell almost 1 per cent to Rs 41.5. Prior to this reduction announced by Posco, domestic spot HRC prices at about $440 per tonne, are already lower by about 25 per cent over previous year.

Analysts say that Posco's price cut could start putting pressure on domestic prices in the new year. However, a cushion for margins for players in the steel industry could be in the form of a lower spot input prices like met coke next year.

With contributions from Shobhana Subramanian and Amriteshwar Mathur