Wipro Limited

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Wipro Limited is an Indian multinational technology services and consulting company, providing IT, consulting, digital, and business process services, primarily to enterprises across various industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Wipro Limited is a global IT services and consulting company headquartered in Bangalore, India. It provides a comprehensive suite of services encompassing IT consulting, systems integration, outsourcing, and business process services. Wipro’s offerings span across various industries including healthcare, financial services, consumer goods, manufacturing, and energy.

Revenue Distribution: Wipro operates through two primary business segments: IT Services and IT Products.

  • IT Services (WIS): This segment contributes the majority of Wipro’s revenue and includes a broad range of services such as application development, maintenance, infrastructure management, testing, and consulting. It serves a broad set of markets across Americas, Europe and the rest of the world.
  • IT Products (Wipro Products): This segment provides clients with a mix of software products and system integration services, including products such as enterprise, security and analytics software. This segment’s revenue is significantly smaller than the services segment.

Wipro generates most of its revenue from IT services, as clients seek expertise in digital transformation and technology-driven business outcomes.

Trends in the Industry: The IT services sector is characterized by rapid technological advancements, increasing demand for digital transformation, and a shift toward cloud computing. Companies like Wipro are adapting to these trends by investing in AI, machine learning, cybersecurity, and data analytics. The industry is also witnessing increased competition and price pressure, pushing companies to offer cost-effective solutions.

Margins: Wipro’s operating margins are influenced by labor costs, pricing pressure, and investments in new technologies and employee capabilities. The company has recently experienced downward pressure on its operating profit. For the fiscal year ended March 31, 2023, Wipro’s operating profit margin was 17.3%, compared to the reported operating margin of 19.6% and 17.9% in 2022 and 2021, respectively, so margins are being squeezed. It’s clear that operating expenses are trending higher than revenues for Wipro, making it hard for the company to improve profitability.

Competitive Landscape: Wipro operates in a highly competitive global IT services market. It competes with other Indian IT giants (Tata Consultancy Services, Infosys, HCL Technologies) as well as multinational companies such as Accenture, IBM, and Capgemini.

A key differentiator for Wipro is its integrated approach to delivering digital, engineering, and business consulting services. The company leverages its extensive experience, domain expertise, and investment in innovative technologies to provide differentiated services to clients. The company has several global alliances with major technology companies like Amazon, Microsoft and Google. Another area of focus for Wipro is building the expertise to provide its customers with edge infrastructure, cybersecurity, data and analytics, AI, and digital engineering, among others. They are also pursuing partnerships with technology providers.

Financials in Detail:

  • Revenue: Wipro’s consolidated revenue for the year ended March 31, 2023 was $11,196.2 million with an average annual growth rate of 9.5% over the last 3 years.
  • Profitability: The net income attributable to the company was $1,222.2 million.
  • Cash flow: From operations Wipro had $1,489 million.
  • Assets: On the balance sheet at the end of March 31, 2023, Wipro reported total assets of $14.588 billion.
  • Liabilities and Equity: Total shareholders’ equity stood at $8,695.8 million and total liabilities were $6,600.2 million.

Wipro’s financial performance indicates a sizable revenue base but pressures on operating profit and profitability suggest ongoing headwinds. The consistent positive growth in earnings per share, and increasing revenue, indicate an improvement in business fundamentals and growth. They also have large cash holdings.

Moat Analysis:

  • Intangible assets: Wipro does have a brand name, but it is not very strong. It also has some certifications and patents, but there is no evidence that their impact on sales or competition. The biggest strength is in their data, process and knowledge, which create switching costs for their clients.
  • Switching Costs: Wipro generates a fair amount of its business through very high-value contracts that make switching to another company very difficult, due to the disruption it could cause. The systems they install may be very entrenched and part of the companies daily operations. The cost of changing those companies over to a competitor may not be worth the gain and they benefit from retaining their clients.
  • Network Effect: Wipro does have some network effects due to the fact that they operate in many locations with the same process. This reduces cost to operate and increases profit. They also use relationships to get new clients. This network effect is not a huge competitive advantage, however.
  • Cost Advantages: As an Indian company, they have a significant labor cost advantage over competitors located in the US or EU. However, this is a common benefit in the industry and so may not produce a very strong economic moat.
  • Moat Rating: 2 / 5 Wipro does have some of the characteristics of a company with an economic moat, however, they do not have a very strong brand and strong pricing power. They do have considerable switching costs and a cost advantage, which helps them earn more than competitors.

Legitimate Risks That Could Harm the Moat and Business Resilience:

  1. Intense Competition: The IT services market is highly competitive, and Wipro faces strong competition from global players. Increased competition and price pressure can lead to lower margins and impact profitability.
  2. Technological Disruption: The fast pace of technological change can make Wipro’s solutions and expertise obsolete. If the company fails to keep pace with new technologies, it could lose its competitive advantage.
  3. Talent Acquisition and Retention: The IT services industry relies heavily on skilled professionals. Difficulty in attracting and retaining talent, particularly in specialized areas, can increase costs and impair operations.
  4. Global Economic Slowdown: A global economic slowdown can reduce the demand for IT services, directly impacting Wipro’s revenue and growth.
  5. Geopolitical Risks: Wipro’s operations are spread across multiple geographies, and it may be affected by political, regulatory, and economic instability in the countries where it operates.
  6. Currency Fluctuations: As a global company, fluctuations in the exchange rates of different currencies could impact revenue and profitability.
  7. Clients Consolidation and Pricing Pressure: With more large and mature clients, pricing power and thus margins can easily reduce, and consolidation of clients might also cause a negative impact.
  8. Decreased demand for certain technologies: The industry is constantly changing and a lack of capability to react to such changes may make some areas where they operate much less valuable.

Business Resilience: Wipro has shown some resilience to negative events and has taken measures to mitigate risks. For instance, the company’s diversified business model across industries provides some buffer against a downturn in any single sector. However, the company’s margins have been struggling recently and it has been failing to hit targets, this may make the company more vulnerable to external shocks. They are also investing heavily into new technologies and areas in order to be better positioned for growth, but it remains to be seen if these investments will be fruitful.

Understandability Rating: 3 / 5

While the core business model of Wipro—providing IT services and consulting—is relatively straightforward, the specific technical aspects of the company’s offerings can be complex. The company’s operations span a variety of industries and geographies, which can make their performance difficult to fully grasp. Therefore, an understandability of 3/5 seems appropriate.

Balance Sheet Health: 4 / 5

Wipro exhibits a relatively healthy balance sheet. The company’s total assets are more than 2x of their total liabilities. They have large cash holdings that are equal to around 30% of their total assets. This cash balance, along with consistent profit generation and high return on invested capital, are indicative of a well-managed company with good financial health. It is important to note that their margins have been trending lower in recent times. Therefore, they are not at 5/5.

While Wipro has not been directly involved in any scandals, they have been facing criticism from various sources in terms of ethics and performance and also from some clients who were not satisfied by their service quality. They also have a history of missing estimates, and the most recent news is that they have cut salaries and bonuses for some people. This has caused a lot of anger in internal company groups and it has led to poor stock performance.

In conclusion, Wipro is a large global IT company that has some elements of a moat and good overall financials. However, it is still a very complicated company and very exposed to volatile industries. Investors should be very aware of the risks and challenges facing the business.