Wipro (WIT) and offshoring: Controvery & profit

"The 'offshoring' of IT development, customer service and back of?ce operations has always been controversial in the U.S. (because of the jobs lost)," observes Paul Goodwin.

In The Cabot China & Emerging Markets Report, he explains, "However, these outsourcing services have also been cost-effective. And outsourcing pioneer Wipro (NYSE: WIT) is very good at it." Here's his review.

"Wipro, the Indian megacap company, has been holding earnings steady as a rock despite the global recession that has ripped the heart out of so many companies.

"The core of Wipro’s operations is its position as a global information technology (IT) services provider. The company does it all, including software, consulting, business process outsourcing (BPO), and both hardware and software R&D.

"For ?scal 2009 (the company’s ?scal year ends in March), 76% of revenues came from IT services, with 13% from IT products and 8% from an odd combination of consumer care products (soap, toiletries and the like), modular of?ce furniture and hydraulic cylinder engineering.

"Wipro, which began as a vegetable oil trading company, has always shown a willingness to seize business opportunities regardless of sector. The company was the ?rst in India to develop and manufacture its own computers.

"The decisive move for the company’s future came in 1980, when Wipro began its move into software development to create customized software packages for its computer customers. 

"During the 1990s, the company began using the global communication infrastructure to offer services in the U.S. and around the world.

"The global economic downturn has not been kind to Wipro’s ?nancial results, but the company has held its own.

"Earnings have been either 14 or 15 cents per share for nine of the last 10 quarters, with year-over-year results ?at in Q2 on a revenue dip of 5%. Despite the pressure on revenues, the company’s after-tax pro?t margin increased to 15.8%, the highest in almost two years.

"But the real story on Wipro revolves around the recovery of the global economy and the company’s plans to broaden its footprint. China will eventually grow into a source of competition, but right now it has need of veteran IT experts, and Wipro quali?es.

"Japan is also becoming a promising market, as the country’s aging population is unable to produce enough new engineers to meet its needs. Wipro’s Japanese revenues rose 15% in ? scal 2009, and are certain to grow rapidly.

"Wipro also continues to leverage its skills into new niches. The company is working on a new automobile navigation system for Hitachi and on medical scanners for Olympus Corp. 

"It also just announced a new product, a platform that will let independent software vendors offer Software-as-a-Service using Oracle software.

"Wipro has a genuinely robust chart, which shows the typical off-the-bottom move from its oversold low of 5 in March. The advance from that point was steady, with just one major correction—a dip from 13 to a double bottom just under 11 in June and July. 

"We think this big, ambitious Indian IT powerhouse is an appropriate pick for a period of turmoil in global markets."