Wipro's Moat Would Be Hard to Wipe Clean

Equity Analyst

Julie Bhusal Sharma

Wipro is a leading global IT services provider with the typical menu of offerings, from software implementation to digital transformation consulting to servicing entire business operations teams. We think Wipro merits a narrow economic moat rating, similar to many of its peers, as we believe it benefits from switching costs and intangible assets, although we also see it benefiting from a cost advantage. While the company will likely struggle amid the COVID-19 pandemic, we think its stable moat trend will stay secure. Forays into the higher-value realm of industrial engineering will help ensure that Wipro does not miss out on substantial growth trends in the overall IT services industry.

In many regards, there’s uncanny resemblance between Wipro and its Indian IT services competitors, Infosys and TCS, such as in its offerings, offshore leverage mix (near 75%), or attrition rates (near 21%). However, Wipro has pockets of solutions where it distinguishes itself. For instance, its robotic process automation services are considered to rank above all other peers according to several sources, including Forrester Research. 

Wipro isn’t unusual for being an IT services provider with switching costs and intangible assets. These are founded on the intense disruption that customers would experience when changing their IT services provider as well as Wipro’s specialized knowledge of the industry verticals it caters to and the distinct knowledge of its customers’ web of IT piping. But besides these two moat sources, we think Wipro benefits more from a cost advantage (which we only allot to Indian IT services companies) based on its labor arbitrage model. While we think benefits from such a cost advantage will diminish over time as the gap between Indian wage growth and GDP growth in primary markets narrows, we think Wipro’s moat is secure as the company’s foray into higher-value offerings and increasingly automated solutions offsets this trend.

Business Strategy & Outlook

We assign Wipro a narrow-moat rating as we think the company benefits from significant switching costs as well as intangible assets, which allow it to achieve significant excess returns on invested capital. Wipro is a leading global IT services provider with standard offerings—consulting, managed services, and cloud infrastructure services as well as business process outsourcing as a service, or BPaaS. In our view, these subindustries are generally primed for switching costs and intangible assets throughout the IT services industry. Additionally, we find that Wipro and its other India IT services peers are able to benefit from a cost advantage based on labor arbitrage, which follows from its large base of Indian talent.

Wipro depends on IT services offerings for 98% of its revenue, with 2% depending on IT products. Wipro’s IT services include a long list of application, cloud, and infrastructure, engineering, and digital operations services. Wipro’s IT products consist of third-party products such as information security solutions, software, and storage. 

Wipro relies heavily on its existing customers for future revenue; they made up 98% of revenue in fiscal 2020 and 98% in fiscal 2019. We think this significant reliance on existing customers shows the strength of Wipro’s switching costs. Wipro provides application maintenance, implementation, and onsite infrastructure services. We think Wipro exhibits switching costs in these areas due to the services’ mission-critical nature. If enterprise software experienced significant downtime or suffered a poor software release, or if a company’s servers were not properly maintained or well balanced in terms of loads, a company could bear immense costs. These risks are increased if a client switches to a new IT services company to manage their infrastructure or applications, as the company must understand all the nuances of infrastructure and applications in the context of how the client uses them and to which other channels they are connected with, resulting in a lengthy switch. 

Wipro offers BPaaS, infrastructure services, and digital engineering. We think all these areas exhibit switching costs. In BPaaS, for example, offerings include insurance processing and HR administration. BPaaS is often a hearty extension of a company’s operations that requires significant tailoring to a client’s needs. BPaaS contracts tend to last several years, which we believe to be a function of the significant time it takes to adjust to a clients’ wants and needs; this could differ significantly from even a competitor in the same vertical. 

We think that switching costs also exist throughout Wipro’s digital transformation consulting arm. Even though the length of these projects is shorter than Wipro’s other offerings, we still believe it is difficult for customers to switch to another IT consultant for new projects, as these projects entail delivering often ambiguous outcomes, which therefore requires much trust. 

We think Wipro has technical expertise gained from putting enterprise solutions to work across hundreds of companies and refining its solutions with every new deployment—a benefit we find often across the IT services industry. We think this moaty technical expertise is maintained and monetized effectively through the company’s vast store of know-how as well as maintaining its talent, lending itself to Wipro’s moat. Wipro has one of the lowest attrition rates of IT services companies in our coverage at 15%. Cognizant and Capgemini have employee attrition rates of 22% and 20%, respectively. This means that Wipro is better able to attract value from its intangible assets as there is less turnover of such assets, as this is retained significantly in talent.

In our view, Wipro benefits from a significant cost advantage from its salary arbitrage, with its large base of Indian employees, which allows the firm to achieve attractive margins. While Wipro is not alone in such labor arbitrage, with Infosys and TCS among such peers, IT services companies that partake in such hefty labor arbitrage do pose a significant benefit, contributing to excess ROICs. We estimate Wipro has offshore leverage near 71%, which would be considered one of the highest in the industry, just after TCS’ and Infosys’ offshore leverage, which we estimate to be near 75%.

Narrow

Economic Moat

Wipro Limited Sponsored ADR

Wipro Ltd. is a global information technology, consulting and outsourcing company, which engages in the development and integration of solutions. It operates through the following segments: Information Technology Services, India State Run Enterprise (ISRE), and Information Technology Products. The Information Technology Services segment provides a range of IT and IT-enabled services, which include digital strategy advisory, customer-centric design, technology consulting, IT consulting, custom application design, development, re-engineering and maintenance, systems integration, package implementation, global infrastructure services, analytics services, business process services, research and development, and hardware and software design to enterprises worldwide. The Information Technology Products segment offers a range of third-party IT products, which allows the firm to provide comprehensive IT system integration services. The ISRE segment is composed of IT services offerings to organizations owned or controlled by the Government of India and any Indian State Governments. The company was founded on December 29, 1945 and is headquartered in Bengaluru, India.

Earnings data Q2 2023

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

Wipro Ltd. is a global information technology, consulting and outsourcing company, which engages in the development and integration of solutions. It operates through the following segments: Information Technology Services, India State Run Enterprise Services, and Information Technology Products. The Information Technology Services segment provides digital strategy advisory, customer-centric design, technology consulting, IT consulting, custom application design, development, re-engineering and maintenance, systems integration, package implementation, global infrastructure services, analytics services, business process services, research and development, and hardware and software design to enterprises worldwide. The Information Technology Products segment offers a range of third-party IT products. The company was founded on December 29, 1945 and is headquartered in Bengaluru, India.

EAST BRUNSWICK, N.J. & BENGALURU, India--(BUSINESS WIRE)---- $WIPRO #Appoints--Wipro Limited today announced that it is appointing Aparna C Iyer as Chief Financial Officer, effective immediately.

Wipro Appoints Aparna C Iyer as Chief Financial Officer

EAST BRUNSWICK, N.J. & BENGALURU, India--(BUSINESS WIRE)---- $WIPRO #Compliance--Wipro Limited announced that it has partnered with ServiceNow to create Wipro CyberTransform - Intelligent ServiceNow Risk and Security Solutions.

Wipro and ServiceNow Join Forces to Improve Risk and Compliance Outcomes

JEFFERSON CITY, Mo. & EAST BRUNSWICK, N.J. & BENGALURU, India--(BUSINESS WIRE)---- $WIPRO #AI--Wipro opens new office in Jefferson City & celebrates partnership with Jobs for America's Graduates, Missouri.

Wipro Opens New Office in Jefferson City & Celebrates Partnership with Jobs for America's Graduates, Missouri

PARIS & EAST BRUNSWICK, N.J. & BENGALURU, India--(BUSINESS WIRE)---- $WIPRO #OceanHealth--Wipro Partners with All-Female Sailing Crew Aiming to Break the Record for the Fastest Circumnavigation of the Globe.

Wipro Partners with All-Female Sailing Crew Aiming to Break the Record for the Fastest Circumnavigation of the Globe

EAST BRUNSWICK, N.J. & BENGALURU, India--(BUSINESS WIRE)---- $WIPRO #CloudITTransformation--Wipro Limited has been recognized as a Leader in the 2023 Gartner Magic Quadrant for Public Cloud IT Transformation Services.

Wipro Named a Leader in 2023 Gartner® Magic Quadrant™ for Public Cloud IT Transformation Services

EAST BRUNSWICK, N.J. & BENGALURU, India--(BUSINESS WIRE)---- $WIPRO #AI--Wipro Limited today released the 2023 edition of its State of Cybersecurity Report (#SOCR).

Wipro's State of Cybersecurity Report Highlights the Emerging Challenges for CISOs

SINGAPORE & KUALA LUMPUR, Malaysia & BENGALURU, India--(BUSINESS WIRE)---- $WIPRO #Cybersecurity--Wipro Limited recognized as a ‘Leader' by ISG Provider Lens™ in their Cybersecurity—Solutions and Services report for Singapore and Malaysia.

Wipro Recognized as ‘Leader' in the ISG Provider Lens™ Cybersecurity — Solutions and Services report for Singapore & Malaysia

SINGAPORE & KUALA LUMPUR, Malaysia & BENGALURU, India--(BUSINESS WIRE)---- $WIPRO #Capco--Wipro Limited recognized as a ‘Leader' in ISG Provider Lens™ Network - Software Defined Solutions and Services report for Singapore and Malaysia.

Wipro Recognized as ‘Leader' in ISG Provider Lens™ Network - Software Defined Solutions and Services Report for Singapore and Malaysia

Wipro, one of India's top providers of software services, wants everyone on staff to know how to use artificial intelligence.

Indian tech giant Wipro will invest $1 billion in AI, including training all staff

Wipro Limited (NYSE:WIT ) Q1 2024 Earnings Conference Call July 13, 2023 10:00 AM ET Company Participants Deepak Kumar Bohra - Senior Vice President, Corporate Treasurer & Investor Relations Thierry Delaporte - Managing Director & Chief Executive Officer Jatin Dalal - Chief Financial Officer Stephanie Trautman - Chief Growth Officer Saurabh Govil - Chief Human Resources Officer Amit Choudhary - Chief Operating Officer Subha Tatavarti - Subha Tatavarti Conference Call Participants Sudheer Guntupalli - Kotak Mahindra AMC Nitin Padmanabhan - Investec Gaurav Rateria - Morgan Stanley Girish Pai - Nirmal Bang Equities Abhishek Kumar - JM Financial Ravi Menon - Macquarie Dipesh Mehta - Emkay Global Mukul Garg - Motilal Oswal Financial Services Operator Ladies and gentlemen, good day, and welcome to Wipro Limited Q1 FY '24 Earnings Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes.

Wipro Limited (WIT) Q1 2024 Earnings Call Transcript

EAST BRUNSWICK, N.J. & BANGALORE, India--(BUSINESS WIRE)---- $WIPRO #GrossRevenue--Wipro Limited announced financial results under International Financial Reporting Standards (IFRS) for the quarter ended June 30, 2023.

Wipro Announces Results for the Quarter ended June 30, 2023, Delivers Net Income growth of 12% YoY

Wipro Limited is the latest multinational to eye growth opportunities via the increasingly dominant artificial intelligence (AI) space. On July 12, the India-based information technology services provider announced a multi-year plan that will see it invest up to $1 billion into AI.

Wipro announces $1 billion investment into AI

Cava Group, Inc.

Disney

Schlumberger

Teladoc

Uber

Frontier Group Holdings

Investing in growth stocks is not for the faint of heart. That's particularly true when it comes to acquiring the shares of companies trying to develop a brand new product or service or investing in the names trying to make big comebacks.

7 Doomed Growth Stocks Destined for Disaster

EAST BRUNSWICK, N.J. & BENGALURU, India--(BUSINESS WIRE)---- $WIPRO #AI--Wipro Limited (NYSE: WIT, BSE: 507685, NSE: WIPRO), a leading technology services and consulting company, today announced the launch of Wipro ai360.

Wipro Launches Wipro ai360, Commits to Investing $1 Billion in AI Over the Next Three Years

EAST BRUNSWICK, N.J. & BANGALORE, India--(BUSINESS WIRE)---- $WIPRO #FirstQuarter--Wipro Limited will announce results for the first quarter ended June 30, 2023, on Thursday, July 13, 2023, after stock market trading hours in India.

Wipro Limited to Announce Results for the First Quarter Ended June 30, 2023, on July 13, 2023

Wipro Limited provides a range of IT consulting and advisory services to organizations worldwide. While management touted its strong growth in bookings, it has provided little forward guidance and Q1's guidance is negative for revenue. With clients reducing discretionary spending amid a macroeconomic slowdown, I remain Neutral [Hold] for WIT in the near term.

Wipro Faces Soft Client Discretionary Spending Amid Macro Uncertainties

CAPE TOWN, South Africa & BENGALURU, India--(BUSINESS WIRE)--Wipro Limited (NYSE: WIT, BSE: 507685, NSE: WIPRO), a leading technology services and consulting company, announced the inauguration of its new office at Sable Park, Century City, in Cape Town, underscoring its commitment to clients in the region.

Wipro Expands Presence in South Africa, Inaugurates New Office in Cape Town

Lexicon Pharmaceuticals

Sidus Space

Virgin Galactic

Are you on the hunt for the next big thing? Ready to catch the wave before it crests?

Penny Stocks To Buy? 4 To Watch With Big News Now

AUSTIN, Texas & BENGALURU, India--(BUSINESS WIRE)--Wipro Limited (NYSE: WIT, BSE: 507685, NSE: WIPRO), a leading technology services and consulting company, announced the opening of its new 5G Def-i Innovation Center (“the Center”) in Austin, Texas, underscoring the company's commitment to helping clients realize the benefits of 5G technology through safer, more sustainable, and compliant products and services.

Wipro Opens New 5G Def-i Innovation Center in Austin, Texas

EAST BRUNSWICK, N.J. & BENGALURU, India--(BUSINESS WIRE)---- $WIPRO #5G--Wipro Limited today launched a managed private 5G-as-a-Service solution in partnership with Cisco.

Wipro and Cisco Launch Managed Private 5G-as-a-Service Solution to Accelerate Enterprise Digital Transformation

EAST BRUNSWICK, N.J. & BENGALURU, India--(BUSINESS WIRE)---- $WIPRO #Buyback--Wipro issues Public Announcement regarding Buyback offer.

Wipro Issues Public Announcement Regarding Buyback Offer

EAST BRUNSWICK, N.J. & BENGALURU, India--(BUSINESS WIRE)---- $WIPRO #BCTV--Wipro VisionEDGE to Power Bowling Center TV's New Digital Out-of-Home Network.

Wipro VisionEDGE to Power Bowling Center TV's New Digital Out-of-Home Network

EAST BRUNSWICK, N.J. & BENGALURU, India--(BUSINESS WIRE)---- $WIPRO #ADS--Wipro Annual Report 2023 on Form 20-F Available Online for ADS Holders.

Wipro Annual Report 2023 on Form 20-F Available Online for ADS Holders

Infosys

J.P. Morgan slapped bearish ratings on both Infosys Ltd. and Wipro Ltd., citing concerns that the “high exposure” the India-based information technology services companies have to discretionary spending leaves them “highly exposed” to downside earnings risks.

Sell Infosys, Wipro stocks as they are ‘highly exposed' to earnings risks, analyst says

EAST BRUNSWICK, N.J. & BENGALURU, India--(BUSINESS WIRE)---- $WIPRO #4Dimagingradar--Wipro Engineering Edge Partners with Spartan Radar to Enhance Assisted and Automated Driving Solutions on its ‘Cloud Car' Platform.

News for Wipro Limited Sponsored ADR Stock (WIT)