The Wipro scrip has been on an upward march since May 1997, fuelled by expectations of a bonus. A bonus of 2:1 resulted in the stock rising further. The scrip went ex-bonus in October at Rs 550. Since February, the scrip has jumped 268 per cent to reign in the range of Rs 1800.
The rise in share prices in the last three months has coincided with unprecedented volumes, an oddity considering that 80 per cent is held by the promoters. But the increase in the number of shares after the bonus has also helped the surge in volumes. In June traded volumes were at an all time high of 472,232 shares and dropped to 207,477 shares in July. Till May 1997, average monthly volumes were around 3000 shares.
The volumes have coincided with the bull run in infotech stocks and Wipro compares well with other industry forerunners. The price-earnings ratio of Wipro at 78.3 is higher than others in the industry. Infosys commands a discounting of 62.1 and Tata Infotech trades at a P/E of 47.9. What makes the Wipro stock tick? Analysts at most research outfits claim the stock is overvalued at these valuations.
The surprising thing is that this stock which is fancied so highly now was not tracked by most foreign brokerage analysts. Their reasons are that there is only 20 per cent floating stock, the company is overdiversified and there was not enough volume to please institutional fund managers. Hence there was little market information available for our research. Misgivings about the scrip's valuation exist. The questions doing the rounds are: Is the price justified? Is the growth sustainable? Does the future bode well for the company? The Smart Investor investigates.
An analyst in a foreign brokerage says Wipro has been traditionally overvalued due to a low floating stock. Wipro has expanded its equity through bonus issues only (in 1992, 1995 and 1997). Not too many institutional investors have been part of the Wipro party. Market sources suggest that it has been only on the smaller brokers' buy list.
Too many businesses
The market view on Wipro is cautious. Analysts are positive about Wipro's infotech business (software and hardware) but are not happy about its other businesses. And as one analyst at a mutual fund points out, "Only 35 per cent of Wipro's business comes from software but the entire company commands a valuation higher than the software industry leader Infosys. I cannot figure this out."
The lighting division, the hydrogenated oils division and others are considered to be major drags on Wipro's performance, and are expected to cloud the company's future growth. The contribution from these businesses is minuscule (See: Sales break-up) and slower growth (See: Growth rates).
Analysts are ambivalent of Wipro's growth model which is unconventional. Till date the management has stuck by its motto of refraining from borrowings and its expansions are funded entirely by internal accruals.
Analysts say it is only a matter of time before the company will have to restructure to be able to use the various sops offered to information technology companies. In its present structure the company cannot offer stock options. Blue Star has already divested its infotech division, which is much smaller than Wipro's, into a separate company. Wipro may also have to do separate the software division or it will not be able to retain employees.
Analysts think that it is only a matter of time before the management takes a view on other businesses. One analyst expects a holding company structure to emerge.
Software rules the roost...
In 1998, Wipro's software division has contributed Rs 394 crore and the horizontal expansion of the division is well planned in future growth areas. Wipro has in its kitty leading edge products like Softchips, Cyber-Manage, Service Edge and Convergent Billing which are well received globally. International operations and exports contributed 50 per cent of the net profit in 1998.
Wipro is the second largest software exporter in India and its overseas operations are spread across Europe, the US and the Asia Pacific region. Wipro's repertoire consists of IT solutions of services, technology and products. Wipro has a large software division with 4000 software professionals working for them making it second to Tata Consultancy Services in employee strength in the country. To combat the shortage of software professionals, the company is training its manpower in horizontal information systems skills with technology coupled with domain knowledge in a few chosen vertical markets.
Wipro provides complete enterprise solutions to corporate clients. Wipro's strength in the field include IBM mainframe skills, client server/distributed computing architecture, web enablement of applications, year 2000, migrations tools, data mining technologies and internet computing.
Wipro also possesses certain domain skills like electronic commerce/finance solutions, healthcare solutions, enterprise resource planning, telecommunications, datacom solutions, and interoperability solutions.
In 1997, Wipro introduced Softchips, a customisable product for integrated circuits. It involves creating reusable intellectual property that encapsulates hardware designs into software. To tap the multimillion dollar semiconductors intellectual property business, Wipro has created a start-up in California.
Wipro Global R&D has been identified as a major growth area too. Wipro will convert its manufacturing capacity at Mysore into a base for its latest initiative _ software testing services. Its manufacturing base, except for peripherals has already been shifted to its Pondicherry facility.
...While others tag along
The hardware business of Wipro contributed Rs 440 crore (including printers and peripherals) in 1998. Though hardware has been identified as a major growth area in the coming years, it is a business with small margins of 5-6 per cent. In the last four years the hardware division has seen nominal growth. But analysts largely remain bullish on the hardware prospects as they feel that it has a good distribution network and standing in the market. Wipro's joint venture with Acer for Acer brand of computers is not doing well. The Acer computer has been positioned as the MNC brand while for the home grown variety Wipro markets the SuperGenius.
The other division of the company is Wipro Consumer Care which manufactures toilet soaps, talcs and vanaspati. The products are Santoor soap and talc, the Shikakai soap and Sunflower vanaspati. The division also introduced Baby Soft toiletries like soap, powder and oil. Only toilet soaps is doing well in consumer care while the others are a drag.
The Wipro lighting division makes and markets lighting products for consumer, commercial and industrial markets and also provides lighting solutions. Wipro Biomed markets and supports a wide range of equipment and consumables for medical, diagnostics and bio-analytical markets. The Fluid Power division offers hydraulic cylinders for construction equipment and truck tipping systems. The division has added another manufacturing facility at Hindupur to augment its capacity. These businesses are not doing well.
The joint venture with General Electric _ Wipro GE Medical Systems _ serves the diagnostic imaging market in south Asia. It exports medical systems products and services from India. Subsidiary Wipro Finance made a loss of Rs 13.78 crore in 1997-98 against a profit of Rs 11.78 crore in March 1997.
Speculation and general buoyant sentiment in infotech stocks have taken the Wipro stock price to levels where it is highly overvalued today. Entering at a price above Rs 1800 is extremely risky, say most analysts. In the coming days, the scrip is expected to lose some of its steam. One can probably consider buying at Rs 1500.
