Wipro - De-merger of consumer business - Prabhudas Lilladher

Wipro announced demerger of the Wipro Consumer Care & Lighting (including Furniture business), Wipro Infrastructure Engineering (Hydraulics & Water businesses), and Medical Diagnostic Product & Services business (through its strategic joint venture), into a separate company to be named Wipro Enterprises Limited. Wipro Limited will remain a publicly listed company that will focus exclusively on IT. We see demerger a ROCE accretive for the IT business. However, we do not expect material upside due to demerger.

- The current state of LCC business: LCC contributes ~14% of revenue ($676m) to Wipro with Gross Margin of 43.3% (Rs14.46bn, ~13% of total gross profit) and EBIT margin of 11.8% (Rs3.96bn, ~6% of total operating profit). Return on Capital Employed for LCC business is ~17.5% against overall ROCE of ~20%.

- The option for the shareholders: The options for shareholders: 1) Receive one equity share with face value of Rs.10 in Wipro Enterprises Limited for every five equity shares with face value of Rs.2 each in Wipro Limited that they hold 2) receive one 7% Redeemable Preference Share in Wipro Enterprises Limited, with face value of Rs.50, for every five equity shares of Wipro Limited that they hold; 3) exchange the equity shares of Wipro Enterprises Limited and receive as consideration equity shares of Wipro Limited held by the Promoter. The exchange ratio will be 1 equity share in Wipro Limited for every 1.65 equity shares in Wipro Enterprises Limited. Each Redeemable Preference Share shall have a maturity of 12 months and shall be redeemed at a value of Rs.235.20

- Valuation & Recommendation - Value unlocking??: FMCG business for Wipro has been dilutive for overall performance. The growth for FMCG (Operating Income YoY growth FY12: 14.6%, FY11: 11.3%) business has been in-line IT Services (FY12: 11%, FY11: 11.4%). Wipro is currently trading at 13.5/12x FY13E/FY14E. Indian FMCG companies, which has ROCE in the range of 20-60%+ and growth ranging from 15%+, are commanding P/E of ~25-30x. But for Wipro's LCC growth and ROCE is lower than its peers. We expect FMCG business to command a P/E of ~20x, hence resulting in limited upside due to de-merger.

Source : Equity Bulls

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