Financial Report Analysis

Wipro India Limited.

Date of submission: 11th September, 2010

Contents
Wipro India Limited ................................ ................................ ................................ ........................... 3 Analysis of the Auditor s Report................................ ................................ ................................ ......... 3 Analysis of the Director s Report ................................ ................................ ................................ ........ 3 Significant accounting Policies ................................ ................................ ................................ ........... 4 1. Basis of preparation of financial statements................................ ................................ ............... 4 2. Use of estimates ................................ ................................ ................................ ........................ 4 3. Goodwill ................................ ................................ ................................ ................................ .... 4 4. Fixed assets................................ ................................ ................................ ................................ 6 5. Depreciation of Assets: ................................ ................................ ................................ .............. 6 6. Impairment of assets................................ ................................ ................................ .................. 7 7. Investments ................................ ................................ ................................ ............................... 7 8. Inventories................................ ................................ ................................ ................................ . 8 9. Revenue recognition ................................ ................................ ................................ .................. 8 10. Income tax and fringe benefit tax................................ ................................ ............................. 9 11. Cash flow statement ................................ ................................ ................................ .............. 10 12. Provisions ................................ ................................ ................................ .............................. 11 Consolidated financial statements ................................ ................................ ................................ ... 11 Ratio Analysis ................................ ................................ ................................ ................................ .. 13 Liquidity Ratios: ................................ ................................ ................................ ........................... 13 Current Ratio: ................................ ................................ ................................ .......................... 13 Debtor Turnover Ratio: ................................ ................................ ................................ ............ 13 Profitablity Ratios: ................................ ................................ ................................ ....................... 14 Profit Margin: ................................ ................................ ................................ .......................... 14 Asset Turnover Ratio:................................ ................................ ................................ ............... 15 Return on Equity ................................ ................................ ................................ .......................... 15 Return on Assets ................................ ................................ ................................ ...................... 16 Earnings Per Share ................................ ................................ ................................ ................... 16 Solvency Ratios: ................................ ................................ ................................ ........................... 17 Debt-Equity Ratio................................ ................................ ................................ ..................... 17 Interest coverage ratio................................ ................................ ................................ ............. 17 Outlook and Concerns ................................ ................................ ................................ ..................... 18

Wipro India Limited

Wipro Limited is the first PCMM Level 5 and SEI CMM Level 5 certified IT Services Company globally. Wipro provides comprehensive IT solutions and services, including systems integration, Information Systems outsourcing, package implementation, software application development and maintenance, and research and development services to corporations globally. In Rs. r over Ne Prof To al A 2304.4 561.9 2114.0 580.3 2317.8 489.8 507.9 105.7 221.3 69.6 340.5 83.7 813.7 171.6 448.4 74.3 35.6 36.9 175.1 54.3

Co TCS Infosys Wipro HC Tech racle inanc phasis ahindra Satyam Tech ahindra inancial Tech atni Computer

M rke Cap Sale 16741.1 16250.9 9926.6 2757.3 1731.8 1365.1 1101.7 873.4 628.2 591.0

Source: www.moneycontrol.com

Analysis of the Auditor s Report

The following salient points of the financial report express the auditor s opinion y No discrepancy being reported by the auditors in bookkeeping, financial statements, records of fixed assets etc. y None of the directors is disqualified as at March 31, 2010 from being appointed as a director y Fixed assets disposed of during the year were not substantial, and therefore, do not affect the going concern assumption y The Company has granted loans to 3 wholly owned subsidiaries y The rate of interest and other terms and conditions on which loans have been granted to companies are not prejudicial to the interest of the Company y The auditors have acclaimed the internal control system commensurate with the size of the Company and the nature of its business with regards to purchase of inventories and fixed assets and sale of goods and services y The auditors have mentioned unpaid dues of Income tax, Excise duty, Customs duty, Sales tax and Service tax by the Company on account of disputes y An instance of embezzlement of Rs 228 million has been reported by the auditors The auditor s report signifies the internal control system and internal audit system which are well in place and also the adherence to Accounting Standards by the company. The auditor s report does not indicate any kind of shortfall or alarming situation in specific.

Analysis of the Director s Report

Salient points of the Director s Report are: y The outlook of the IT-ITeS industry is positive and as IDC forecasts a CAGR of 4.08% spending and a CAGR of over 6.18% in offshore IT spending, for the period 2008-13.

illions e 1515.2 2203.6 2322.2 400.2 417.8 215.1 738.1 500.2 217.6 320.5

 

  

y y y y y

Technology companies have been outsourcing software research and development and related support functions to offshore technology service providers to reduce cycle time for introducing new products and services. Both Sales and the profits saw an upward trend for year 2010 A final Dividend of 300% (Rs. 6 per equity share of Rs. 2/- each) has been indicated by the management subject to the approval of the shareholders Company entered into partnership with Lavasa Corporation Limited, a joint venture with Delhi International Airport Private Limited, a JV with GE ealthcare. The company acquired the Yardley Brand business in Asia, Middle East, Australia and certain African markets from UK based Lornamead Group. The Company made acquisitions and investments of an aggregate of US$ 171 Million

All these points are indicating the positive outlook for the industry. The investments in Subsidiaries, acquisition of Yardley group are some facts strengthening the company s view for the same.

Significant accounting olicies

1. Basis of preparation of financial statements
The financial statements are prepared in accordance with Indian Generally Accepted Accounting rinciples (GAA ) under the historical cost convention on the accrual basis, except for certain financial instruments which are measured on a fair value basis. GAAP comprises Accounting Standards specified in the Companies (Accounting Standards)Rules, 2006, Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI) and other generally accepted accounting principles in India.

2. Use of estimates
The preparation of financial statements in accordance with the generally accepted accounting principles requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Estimates and underlying assumptions are reviewed on an on-going basis. Revision to accounting estimate is recognised in the period in which the estimates are revised and in any future period affected.

3. Goodwill
The goodwill stated for the year 2009 amounted to Rs. 56521 Million. The goodwill policy is stated from the excerpt of the annual report:The excess of consideration paid over the book value of assets acquired has been recognised as goodwill in accordance with Accounting Standard (AS) 21 Consolidated Financial Statements . Goodwill arising on account of acquisition of subsidiaries and affil iates is not amortised but reviewed for impairment if there are indicators of impairment. Upon review for impairment, if the carrying value of the goodwill exceeds its fair value, goodwill is

considered to be impaired and the impairment is charged to the income statement for the year.

Asset Goodwill

(In Rs. Million) As of March 10 As of March 09 Net change in Goodwill 53,346 56521 (3,175)

There is a net decrease in Goodwill by Rs. 3,175 million during the year. The decrease of Rs. 4,877 million is due to impact of reinstating goodwill relating to non integral overseas operations. In December 2009, the Company has entered into a purchase agreement with Lornamead Group Limited to acquire the entire share capital of Lornamead FZE and Lornamead Personal Care Private Limited for cash amounting to Rs. 1,766 Million. The Company has also paid Rs. 348 Million for acquisition of Yardley Trademark, which has been recorded as an intangible asset.The Company has recorded goodwill of Rs. 1,712 million in respect of this acquisition. Thus the change is goodwill is as accounted: (In Rs. Million) Goodwill as on March 09 56,521 Amortization of goodwill during the year relating to overseas operation (4,877) Increase in goodwill due to acquisitions during the year 1,712 Goodwill as on March 10 53,356* *The difference of 10 Million goodwill is however, not explicitly mentioned in the annual report

4.Fixed assets
Fixed assets arestated at historical cost less accumulated depreciation. Costs include expenditure directly attributable to the acquisition of the asset. Borrowing costs directly attributable to the construction or production of qualifying assets are capitalized as part of the cost. The break-up of the Company s investment Rs. 10,900 million on Fixed Assets is shown as: (Rs. in Million) Business Unit IT services & products Consumer Care and Lighting Others 2010 9,774 711 417

5.Depreciation of Assets:
Salient points from the company s depreciation policy are
y y

The Company has provided for depreciation using straight line method Fixed assets individually costing Rs. 5,000/- or less are depreciated at 100%over a period of one year. Assets under capital lease are amortized over their estimated useful life or the lease term, whichever is lower Intangible assets are amortized over their estimated useful life on a straight line basis.

For various brands acquired by the Company, estimated useful life has bee determined n ranging between 20 to 25 years. Accordingly, such intangible assets are being amortized over the determined useful life. Payments for leasehold land are amortized over the period of lease

Comparing with Infosys depreciation policy, the depreciation policy of both Wipro and Infosys are same. Wipro has been consistently following the same depreciation policy over last few years. Below table compares the estimated useful life of assets of Wipro and Infosys:

6. Impairment of assets
The impairment of assets policy followed by the company can be adjudged from the following excerpt in their annual report:Financial assets:
y y

If any indication of impairment exists at the end of year the impairment of financial assets is done and impairment loss is recognized in P&L account If at the balance sheet date there is any indication that if a previously assessed impairment loss no longer exists, the recognised impairment loss is reversed, subject to maximum of initial carrying amount of the short-term receivable

Other than financial assets:

y y

If there is any indication that a non-financial asset including goodwill may be impaired, the Company estimates the recoverable amount of the asset. If such recoverable amount is less than its carrying amount,the reduction is treated as an impairment loss and is recognised in the profit and loss account

Analysis:In the year 2010, there was NO impairment loss being observed for the financial assets. For non-financial assets, the company saw an impairment of their goodwill to the amount of Rs. 4877 million. This impairment is attributed to impact of reinstating goodwill relating to non-integral overseas operations at the exchange rates prevailing on March 31, 2010

7. Investments
Long term investments are stated at cost less any other than temporary decline in the value of such investments. Current investments are valued at lower of cost and fair value determined by category

of investment. The fair value is determined using quoted market price market observable information adjusted for cost of disposal

8. In nto i s
Excerpts from Wipro s accounting policy on inventory valuation:

The following exhibit summarizes the changes in inventories of March, 2010 against March 2009.

Excerpts from Annexure to Auditor s report on inventory related accountng practices by Wipro: i 2 a) he inventory, except good -in-tran it and stocks lying with third parties, has been physically verified by the management during the year. In our opinion, the frequency of such verification is reasonable. For stocks lying with third parties at the year-end, written confirmations have been obtained. b) he procedures for the physical verification of inventories followed by the management are reasonable and adequate in relation to the size of the Company and the nature of its business. c) he Company is maintaining proper records of inventory. he discrepancies noticed on physical verification between the physical stocks and the book records were not material.

9. Revenue reco nition

Policies of revenue recognition are: Services 1. Revenue from Software development services y y 2. 3. 4. 5. 6. 1. Time and material contracts - as related services are performed Fixed- price, fixed-time frame contracts - Percentage of Completion method BPO services are derived from both time- based and unit-priced contracts-as the related services are performed Revenue from application maintenance services is recognised over the period of the contract Revenue from customer training, support and other services is recognised as the related services are performed Unbilled revenues represent cost and earnings in excess of billings Unearned revenues represent billing in excess of revenue Revenue from sale of products - when the product has been delivered, in accordance with the sales contract.

Product

& 1 '(' & 4& (($2$

In nto i s a va u d a o o o and n a zab va u n ud ng n Inv n o ob o n Co d n d u ng he weighted average method

a p ov on o

% '( $ '6&$% $ 5 ' )2 ' 3$ ) $) ') $& % $ % ( 2 1 &$0 ) % 7 ( (

(' % ( 5$2 $2($) ( $ ) $& "($'& %" $ # ! 8 7 7



7 5

Other income

1. 2. 3. 4.

Agency commission - when shipment of consignment is dispatched by the principal. Profit on sale of investments - upon transfer of title by the Company Interest earned - time-proportion method, based on rates implicit in the transaction. Dividend income - when the Company s right to receive dividend is established

Analysis: 1. From the different policies, the company can be considered conservative enough as evident from percentage of completion method, for contracts revenues are being recognized as services are performed. Probable losses for incomplete projects are recognized in the same year only. 2. The only concern here is that the unbilled revenues are growing whereas the unearned revenues are decreasing. Item Unbilled revenue Unearned revenue 2010 16708 7462 2009 14108 8734 Change 2600 -1272

3. The revenue recognition policies of the company are consistent in all the recent years and there is no change in policies in last 4 years. 4. The competitor like Infosys adopts the same policies so the policies are consistent with competitors also.

10. Income tax and fringe benefit tax

Income tax: The current charge for income taxes is calculated in accordance with the relevant tax regulations. Deferred tax:
y y y y

Deferred tax assets and liabilities are recognised for the future tax consequences attributable to timing differences The reversal of timing difference is determined using first in first out method. The effect of a change in tax rates is recognised in the period that includes the enactment/substantive enactment date. Deferred tax assets on the timing differences due to unabsorbed depreciation and losses are carried forward only to the extent that there is virtual certainty that sufficient future taxable income will be available against which such deferred tax assetscan be realized. Deferred tax assets are reassessed for the appropriateness of their respective carr ing y amounts at each balance sheet date.

PP I

7679 0 9

Deferred tax asset 5395 Balance at end of 009 406 Deferred tax during year 60 Balance at end of 010

G FAE

D CBA PP I

Item ax expense urrent tax FBT Deferred tax asset

2010

200

H @

Rs. (in million) 577 9 348

11. Cash flow statement

Cash flows are reported using the indirect method. The cash flows from regular revenue generating, investing and financing activities of the Company are segregated. Summarised Cash flow statement for 5 years

Profit before tax Net cashflow operating activity Net cash flow in investing activity Netcash used in financing activity Net cash flow

5,688.80 4,477.40 -3,064.60 -96.2 1,316.60

3,547.90 4,344.50 -3,662.70 -70.7 611.10

3,469.70 715.9 -1,127.50 2,290.90 1,879.30

3,176.20 2,674.60 -1,881.90 238.5 1,031.20

Cash flow comparison of standalone and consolidated statements CASH FLOW Profit before tax Net cashflow operating activity Net cash flow in investing activity Netcash used in financing activity Net cash flow Standalone Consolidated 5,688.80 55095 4,477.40 50998 -3,064.60 -33815 -96.2 -164 1,316.60 17,019.00

The negative cash flow in investing activities is due to purchase of investments, investments in subsidiaries, investment in deposits etc. It indicates that company is on a growing path which is also evident from increase in cash flow due to depreciation in operating activities Sale of financial assets
y y y

During the year ended March 31, 2010, the Company transferred financial assets of Rs. 1,666 Million (2009:Rs. 539) Proceeds from transfer of receivables on non-recourse basis are included in operating activities Proceeds from transfer of receivables on recoursebasis are included in financingactivities

Income tax dispute y The Company had received tax demands from the Indianincome tax authorities aggregating to Rs. 11,127Million (including interest of Rs. 1,503 Million) for years 2001 to 2004 y The taxdemand was primarily on account of denial of deduction claimed by the Company in respect of profits earned by its undertakingsin Software Technology Park at Bangalore y In December 2008, theCompany received, on similar grounds, an additional taxdemand of Rs. 5,388 Million (including interest of Rs. 1,615Million) for year 2005 y The company received a demand of Rs.6,757 Million (including interest of Rs. 2,050 Million) forthe financial year ending March, 2006. y Considering the facts and nature of disallowance and theorder of the first appellate authority upholding Company sclaims for earlier years, the Company expects the finaloutcome of the above disputes in Wipro s favour These disputed tax demand is a huge sum which company would be liable to pay in case the order is upheld and in that case there will be a huge impact on company s profitability

CASH FLOW

ar ' 10

ar ' 09

ar ' 08

ar ' 07

ar ' 06

2,340.43 1,912.25 -1,694.42 59.8 277.63

12. rovisions
Provision for warranty represent cost associated withproviding sales support services which are accrued atthe time of recognition of revenues and are expected tobe utilized over a period of 1 to 2 year. Other provisionsprimarily include provisions for tax related contingenciesand litigations. The timing of cash outflows in respect ofsuch provision cannot be reasonably determined. Theactivity in the provision balance is summarized below:

Provision at the beginning of the year Additions during the year, net Utilised during the year Provision at the end of the year

685 469 (622) 532

1387 394 (18) 1763

671 621 (607) 685

Consolidated financial statements

Wipro is a global corporation having operations in more than 35 countries through 80 subsidiary companies, a few joint ventures and associate companies. As per the Companies Act, 1956 the annual report of the company should contain balance sheet and P&L Account of all the subsidiaries of the company. owever, since Wipro limited has more than 80 subsidiaries, they have been granted a special exemption from the Ministry of Corporate affairs in presenting the detail financial analysis of each subsidiary. This can be inferred from the following excerpt We believe that the Consolidated Financial Statements present a more comprehensive picture rather than the standalone financial statements of Wipro Limited and each of its subsidiaries. We, therefore, applied to the Ministry of Corporate Affairs, Government of India and sought an exemption from the requirement to present detailed financial statements of each subsidiary. Hence, we have given the stand-alone and consolidated financial statements as follows:-

Balance sheet comparison (Standalone and conslolidated)

Year(2010) SOURCES OF FUNDS : Total Shareholders Funds Total Debt Total Liabilities A LICATION OF FUNDS : Gross Block Less: Accumulated Depreciation Consolidated 1,82,443.00 62,513.00 2,45,393.00 1,39,599.00 42,314.00 Stand-Alone 1,76,922.00 55,302.00 2,32,224.00 67,613.00 31,050.00

VV

articulars

For the year ended arch 31, 2010 rovision for Others Warranty

For the year ended arch 31, 2009 rovision for Others Warranty 802 585 1387

Net Bloc Capital Wor in rogress Investments Total Current Assets Less: Total Current Liabilities Net Current Assets Net Deferred Tax Total Assets

97,285.00 12,355.00 34,060.00 1,82,129.00 80,690.00 1,01,439.00 254 2,45,393.00

36,563.00 9911 89,665.00 1,65,105.00 69,368.00 95,737.00 348 2,32,224.00

Analysis of data The increase in total liabilities by Wipro ltd. on account of investment in its subsidiaries is to the tune of Rs. 13,169 millions. The gross block amount on account of subsidiaries increases by amount of Rs. 60,722 millions. Capital work in progress is increased by Rs. 2,444 millions. Accordingly, investments in subsidiaries turn out to be Rs. 55,605 millions. rofit & Loss Account Consolidated Stand-alone 2,77,543.00 2,13,673.00 63,870.00 1232 62,638.00 7543 0 55,095.00 8665 498 45,932.00 2,39,083.00 1,75,315.00 63,768.00 1084 62,684.00 5796 56,888.00 7679 0 229 48,980.00

Year (2010) INCOME : Total Income EX ENDITURE : Total Expenditure Operating rofit Less: Interest Gross rofit Depreciation Minority Interest(before tax) rofit Before Tax Tax Deferred Tax Net rofit

As per the Companies Act, 1956 the annual report of the company should contain balance sheet and P&L Account of all the subsidiaries of the company. However, since Wipro limited has more than 80 subsidiaries, they have been granted a special exemption from the Ministry of Corporate affairs in presenting the detail financial analysis of each subsidiary.

X W

Ratio Analysis
Liquidity Ratios :
Current Ratio: Current ratio = Current Assets/Current Liabilities The higher the current ratio, the company can repay its obligations. If the ratio is under 1, then the company would be unable to pay its liabilities.

Current Ratio
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0
4.47

2.1 1.63

Wipro

Infosys

TCS

The current ratio of 2.1 for Wipro is a very healthy ratio but comparatively higher than the competitors. But Infosys has got a very high Current Ratio of 4.47. All the companies have enough short term assets to cover their short term debt. Infosys with its very high current ratio is not investing its excess assets. The industry average is 2.67 Debtor Turnover Ratio: Debtor Turnover Ratio = Sales/Average Debtors

ebtors Turnover Ratio

7
6 4.98

6.37

6.54

5 4 3 2
1

0
Wipro Infosys TCS

The industry average is 5.42. The debtors are high in the IT industry, as the bills are collected only after certain period of time. The debtors turnover ratio is poor for Wipro, as it is for its peers. The following table shows a trend for last 5 years of the liquidity ratios for WIPRO ltd. Liquidity ratio Current Ratio Debtors turnover ratio Mar-10 Mar-09 Mar-08 Mar-07 Mar-06 2.1 2.11 2.15 1.57 1.46 5 5.34 5.7 6.1 6.12

rofitablity Ratios:

rofit Margin: Profit after Margin or Return on Sales measures the amount of net profit earned by each rupee of revenue and is given by Profit After Sales/Tax.

` Y

rofit Margin
30 25

26.31 24.13 20.97

20 15 10 5
0

Wipro

Infosys

TCS

Wipro s profit margin is low when compared to its peers. The profit margin has decreased by 3.4% when compared to last year. Asset Turnover Ratio: Asset Turnover Ratio = Sales/Assets This ratio indicates how effectively the firm s use their assets.

Asset Turnover Ratio

6 5
4 3 3.47 5.59 4.74

2 1 0 Wipro Infosys TCS

Companies with high profit margins usually have low asset turnover. The trend is similar in case of Wipro. Among the peers, Infosys has the highest asset turnover ratio.

Return on Equity Return on Equity = Profit after Tax/Shareholder's Equity

This measures the profit generated by a company with the money from Shareholders.

Return E uity
35

30
25 20.2

28.7

20
15

16.7

10 5
0 Wipro Infosys TCS

The Return on equity for Wipro is low when compared to its peers. This gives an indication for the prospective shareholders on where to invest. Return on Assets Return on Assets = Profit After Tax/Total Assets This gives an idea of how effectively the management is using its assets to generate earnings.

Return on Assets
450 400 350
300 250 200 384.69

150 100 50 0

120.49 76.72

Wipro

Infosys

TCS

This ratio is a good indicator of the financial performance of the company. Though Infosys is leading here, Wipro s return on assets has been consistently increasing over the past few years and continuing at the same levels the company can increase the revenues much higher. Earnings er Share

EPS of Wipro has steadily increased over the past few years. This indicates that the company is on a growth path.

Earnings er Share
120

101.3
100

80 60 40 20
0 33.36 28.62

Wipro

Infosys

TCS

Solvency Ratios:
Debt-Equity Ratio

Debt Equity Ratio

0.4 0.35
0.3 0.35

0.25
0.2

0.15 0.1
0.05

0
Wipro Infosys

0
T S

Due to volatile nature of the software business, companies do not normally ta e debt. The industry average for debt equity ratio is zero. But Wipro seems to be an exception in this case. Wipro s last 5 years data for the same shows that there has been a considerable increase in debtequity ratio from 1% to a present value of 35% in last 5 years. Interest coverage ratio

Interest Coverage Ratio

4000

3761

3500
3000

2500 2000
1500

1000
500 53.48 Wipro

668.75

The lower interest coverage ratios are bad for a company. Wipro s interest coverage ratio is lower than that of the industry average of 439.59.

Infosys

T S

Analysis of DU- ont ratios DU- ont Ratios PAT/Sales Sales/Assets Assets/Equity ROE

ROE is almost stable for the company. The DU- Pont break up gives: 1. Here gross margin is increasing which is a good sign 2. Assets turnover is decreasing which is a point of concern 3. Assets/Equity ratio is almost stable over the years.

Outloo and Concerns

After the global recession, Wipro following the trend of the Indian IT industry has been winning new deals. The company is also seeing stability in fees for services after brutal slide in the previous two years. Wipro hopes to maintain or improve profit margins for the current fiscal year. A firm rupee has been denting the profit margins of the IT companies and Wipro is no exception to it. With demand picking up in the IT job market, the rising wages remains the other concern for the company.

Mar-10 Mar-09 Mar-08 Mar-07 Mar-06 0.21 0.14 0.17 0.21 0.20 0.99 1.23 1.14 1.44 1.59 1.31 1.4 1.34 1.03 1.01 0.28 0.24 0.26 0.31 0.32