Will Reprogramming Take Wipro Places?

RESTRUCTURING
Will Reprogramming Take
Wipro Places?

CEO Azim Premji needs to hive off the software division into a company to unleash its potential under President Vivek Paul.

By Dilip Maitra

Azim Premji, Chairman, Wipro: "We have no immediate plans to hive off any business" Azim Hasham Premji, the Chairman and Managing Director of Wipro, rarely speaks to the media, leaving his managers and his company's bottomline to do the talking. These days, the Press positively petrifies Premji. Ever since he was adjudged the richest Indian in the world by Forbes-with a personal net worth of $3 billion, which is what his 75 per cent shareholding in Wipro is worth-the paparazzi have been hounding him. So much so that the Bangalore-based industrialist has virtually become a hermit.

But that is part of the Premji style. No hype, no bluster. So, when he began a quiet restructuring at Wipro in January, 1999, it went largely unnoticed. In that internal recast, Wipro's major businesses were put under 4 different groups: software, hardware and systems, consumer-care and lighting, and fluid power. Each of these is headed by a president reporting to the CEO. Premji also appointed the US investment bank, Morgan Stanley Dean Witter, to study Wipro's financial structure and recommend the most optimal structure for growth. Innocuous?

Well, not really. Barely 6 months after Premji made these moves, an exciting new picture is emerging. Last fortnight, on July 12, 1999, Wipro announced that the head of the infotech business, Ashok Soota, 57, was quitting to strike out on his own. And that Wipro was appointing Vivek Paul, 41, in his place. A former executive at General Electric (GE) where he headed GE's $700 million global Computerised Tomography business, Paul will head Wipro's software development business.

V. Paul, Vice-Chairman, Wipro: "There is satisfaction in treading on new ground" Why would the high-flying head of a Rs 3,000 crore GE business give it all up to run a puny Rs 632-crore division of a Rs 1,850 crore Indian company? Because there is lot more to it than meets the eye. For one, Wipro has massive plans for its software division, which is its second-largest business (after computer hardware and systems), generating 35 per cent of the company's turnover. Second, it is Wipro's only business that has global potential.

Most important, Wipro's software business is raring to go places. The US, actually. Paul, will operate from Santa Clara, California, where Wipro's US office is located, but that is just for starters. The buzz at Wipro's M.G. Road headquarters is that the software division will be spun off into a separate company, which may later issue American Depository Receipts (ADRs), and be listed on the Nasdaq. Says Paul: ''Why am I joining Wipro? Because there is a special satisfaction in building something, in treading on new ground.''

Wipro's top brass-Premji included-is tight-lipped about the restructuring. Says Premji: ''We have no immediate plans to hive off any business.'' But no one is denying that separating the software business makes eminent sense. Wipro's businesses span disparate sectors: consumer products, computer hardware, lighting, and software. And analysts feel that although Wipro, with its market capitalisation of more than Rs 20,000 crore, is in fine fettle financially, there is much to be gained by carving out a standalone software company. Even Wiproites agree with that. Says a senior executive: ''If Wipro's software business is to grow exponentially, it will have to hive off the division into a separate company. But the decision will depend on what the consultants suggest.''

As a separate company, the software division-which is the second-largest software exporter after Tata Consultancy Services, with exports of Rs 630 crore in 1999-can leverage itself better than as one of 4 divisions. Of course, the recast in January, 1999, has tried to solve that. In Wipro's verticalised avatar, each of the company's divisions is run like a separate company. And each has its own president: former ABB CEO Arun Thiagarajan heads hardware and systems, P.S. Pai heads consumer-care and lighting, while Vivek Paul will head software. And the small fluid power business, which contributes just 5 per cent to Wipro's turnover, is headed by M.S. Rao.

Software, by far, is Wipro's most profitable business. And also the reason why the Wipro stock is a hot buy: Wipro's Rs 10- share was quoting at Rs 4,225 on the Bombay Stock Exchange (BSE) on July 13, 1999. And its Price-to-Earnings (P-E) multiple is a whopping 114. The operating margin in Wipro's software division last year was 26 per cent as compared to 5 per cent in the computer hardware business, and 12 per cent for the consumer-care and lighting business. The division's Return On average Capital Employed was 71 per cent compared to 20 per cent for hardware and 64 per cent for consumer-care and lighting.

By spinning off the software business, Premji could unleash its financial potential. Although Wipro is highly profitable, with net profits of Rs 170 crore on a turnover of Rs 1,853 crore in 1998-99, and has reserves of Rs 411 crore, it could still make sense for the company to tap international sources of finance. Says Wipro's Executive Vice-President (Finance), Suresh Senapathi, 42: ''If we need money, we may go for an ADR issue. But nothing has been decided as of now.''

A listing on the Nasdaq has other advantages. For instance, Infosys Technologies' ADRs, which were listed on the Nasdaq on March 11, 1999, were quoted at $87 on July 14, 1999. Translated into a share price, that works out to $174. In rupee terms, the Nasdaq price for Infosys shares is Rs 7,743 while its domestic price on the BSE is Rs 4,600. Says Patrick Sutch, 49, Director (Asia-Pacific), for the Nasdaq: ''Nasdaq gives you the best valuation for technology stocks, and that should help you improve valuation in your domestic market.'' The lesson for companies like Wipro: a listing on Nasdaq can boost value, credibility, and image.

Avers R. Venkataraman, 32, Director, Probity Research: ''The most important advantage of a listing on Nasdaq is the tremendous boost in credibility and image of a company.'' That is important because the US is the biggest market for Indian software companies, and Wipro's software division gets 75 per cent of its revenues from the US. It could even help Premji acquire infotech companies there. Says Probity's Venkataraman: ''Cash deals for takeovers need all sorts of permission from the government. With shares, it is fairly simple.'' Besides, shares can also be used to offer stock options to foreign employees.

Actually, Wipro is a multi-product company, and its portfolio includes everything: from vanaspati to soaps and electric bulbs to fluid power for hydraulic systems. On the Nasdaq, investors are sure to frown at such a lack of focus. So, if Premji has Nasdaq on his mind, he'll have to hive off. Spinning off software will certainly hit Wipro's profitability as well as its current market valuation. But the counter-argument is that it can actually benefit the company.

A possible modus operandi:

Wipro can first carve out its software business into a 100 per cent subsidiary. Based on profits of Rs 165 crore in 1998-99 and a P-E ratio of 113-the same as Infosys-the subsidiary could have a market capitalisation of Rs 18,650 crore.

Wipro can then list the subsidiary on the Nasdaq by issuing adrs worth 20 per cent of its equity, which will net the parent organisation Rs 3,730 crore (20 per cent of Rs 18,650 crore).

With a cash inflow of that order, Wipro can not only retire its Rs 281 crore of debt, but also have money left to play around with-either for pumping into the expansion plans for its existing businesses, or even for acquisitions. So, Premji can have his billions, eat them-and grow them too.

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