Unstitching Wipro. Comment Institutional EYE

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Cecily Stanley
5 years ago
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1 Unstitching Wipro Separating the IT business from a diverse set of businesses is advantageous to investors. Giving shareholders an exit option from an unlisted company, including through a share exchange benefits them too. But there is not enough clarity on the new entity, Wipro Enterprises and investors have right to know about Azim Premji s vision for the company. Only then can investors make the right choice. The Board of Directors of Wipro Limited in their meeting held on 1 November 2012, approved the 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 information technology (IT). Wipro Enterprises Limited will not be listed company. A copy of the company s press release is given below. What s on offer? Investors can (i) 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; or (ii) 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; or (iii) 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. The restructuring cuts the clutter in Wipro Limited and in the first instance, separates IT from a host of other businesses, enabling these to focus and pursue independent strategies. And first cut valuations appear even-handed. Given that Wipro Enterprises will not be listed, offering minority investors deferred liquidity through redeemable preference shares or near cash through a share exchange with those of Wipro Limited seems thought through. But offering shares in an unlisted company is not a real choice. But given that Wipro Enterprises will be unlisted, the management has not provided any basis to investors on whether they should bank the cash or hold on to unlisted equity. Wipro s management, and this includes Premji, have to throw colour on Wipro Enterprises. Toilet soaps and office furniture are not sold through the same channel. And nor do hydraulics and pneumatics sit well with lighting. Is management thinking about divesting the lighting business and investing the proceeds in hydraulics and pneumatics? or hiving-off toilet soaps to invest in lighting? Does the management have a focussed strategy in place or will the pursuit of independent growth plans suffice? Are they thinking of further splitting Wipro Enterprises and then list the various underlying businesses separately anytime soon? Is there any 1

2 time line for listing? If so, is this three years or seven or is it uncertain? Azim Premji may not share the details, but he has to share his vision with investors. In the absence of this, offering Wipro Enterprises shares is a hollow choice. The absence of clarity on Wipro Enterprises given that it is not being listed only help fuel suspicion that this decision is guided by Azim Premji s compulsions to bring down his holdings in Wipro to 75%, in line with the revised listing guidelines and not any business reasons. This may not be true. To give a brief background here. In June 2010 the Securities Contracts (Regulations) Rule, 1957 was amended. It recommended a uniform limit of 25% public shareholding for all companies irrespective of what requirements applied to them at the time of their initial listing. About 180 companies, including Wipro Limited are impacted by this. Azim Premji has done more than almost all others to bring down his holding in an orderly manner. This includes the sale by Azim Premji Trust s in March 2012 through auction route. This offer garnered only 71% subscription, receiving bids for 24.8 million of shares against the 35 million Wipro Limited shares. Sponsor Holding % Quarter ended March June September December Should Wipro Enterprises be listed as a part of this restructuring? Any demerger scheme needs stock exchange approval, which usually insists that the spin-off entities shares are listed. The expectation here seem to be that by providing an exit option to shareholders upfront, this new entity need not be listed. The exchanges have not yet spoken. The business case to list however is not very strong. Wipro Enterprises has a seemingly healthy Rs 33,505 mn turnover, and a few of these have grown rapidly, but it is an amalgam of unrelated businesses - toilet soaps, hydraulic and pneumatic equipment, lighting products, office furniture, medical diagnostics among others. Listing them as one increases the pressure to disentangle these sooner rather than later; and unpicking Wipro Enterprises will be taxing for both investors and management alike. But holding equity in multiple uneconomically sized listed entities cannot profit minority shareholders. 2

3 Wipro Limited: Income from sales of other products 31-Mar Toilet Soaps 8,404 10,996 Hydraulic and pneumatics 6,186 8,672 Lighting Products 2,075 5,092 Others 6,422 8,745 23,087 33,505 Which of the three options should the investor choose? While investors can weigh the deferred cash against Wipro s shares, asking them to do so without any information on what are the management s plans for Wipro Enterprises is unreasonable. Investors have the right to know more and Wipro has an obligation to provide answers. Only then can investors hope to take the right decision. PS: On the matter of ADR holders who hold 1.73% of the outstanding equity. The company should explore giving Wipro ADR s in exchange rather than Wipro Limited shares. About Institutional Investor Advisory Services IIAS is an voting advisory firm that provides participants in the Indian financial markets with independent opinions, research and data on corporate governance issues. To know more visit Contact gopal.agarwal@iias.in 3

4 Wipro Press Release Wipro Charts a New Course November 1, 2012, Bangalore, India: The Board of Directors of Wipro Limited in their meeting held today, approved the 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 information technology. Wipro Enterprises Limited will be an unlisted company. In fiscal year , the IT business contributed to 86% of revenue and 94% of operating profit of Wipro Limited. The demerger is anticipated to provide fresh impetus for both Wipro Limited and Wipro Enterprises Limited to pursue their individual growth strategies. The demerger is also expected to improve the competitiveness in their respective markets. The Board of Wipro Limited will remain unchanged, and the demerger will have no impact on the management structure of Wipro Limited. There will be no change in the leadership of any of Wipro Enterprises Limited s constituent businesses. Wipro brand will be jointly owned by both the companies. Azim Premji will remain Executive Chairman of the Board of Wipro Limited and will assume the position of Non-Executive Chairman of Wipro Enterprises Limited. I am confident that the demerger will enhance value for our shareholders, and provide fresh momentum for growth. Each of our distinct businesses is best of breed in its respective industry, and we are committed to both the businesses, said Azim Premji, Chairman, Wipro Limited. Creating a technology-focused company will allow us to better serve the needs of our customers, and accelerate investments necessary to capitalize on market growth opportunities said TK Kurien, CEO, IT Business and Executive Director, Wipro Limited. The businesses of Wipro Enterprises Limited are diverse, and this demerger gives them an opportunity to pursue their independent growth plans. I believe the demerger scheme reflects a high standard of governance, transparency and fairness for all stakeholders, said Suresh Senapaty, CFO and Executive Director, Wipro Limited. Wipro has constituted a special committee of its board of directors to oversee the planning and execution of the demerger plan. The special committee comprises independent directors N. Vaghul, Bill Owens and M. K. Sharma. The appointed date for the demerger is opening of business hours on April 1, 2012, and the demerger is expected to be completed by the next fiscal year. This demerger is subject to Indian court approval and regulatory approvals. According to the restructuring scheme as currently proposed, resident Indian shareholders of Wipro Limited on the record date can choose from multiple options as per their investment objectives. They may opt to: (i) 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; or (ii) 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; or (iii) 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. 4

5 Each Redeemable Preference Share shall have a maturity of 12 months and shall be redeemed at a value of Rs Non-resident shareholders (excluding ADR holders) and the ADR holders on the record date would be entitled to receive equity shares of Wipro Enterprises Limited in the aforesaid ratio. The Nonresident shareholders (excluding ADR holders) shall further have the option to exchange the Wipro Enterprises Limited equity shares that they are entitled to and receive equity shares of Wipro Limited held by the Promoter in the aforesaid ratio. According to the restructuring scheme as currently proposed, the Wipro Enterprises Limited equity shares that the ADR holders would otherwise be entitled to receive shall be compulsorily exchanged for equity shares of Wipro Limited held by the Promoter in the aforesaid ratios. Subject to receipt of all Indian and U.S. Securities and Exchange Commission approvals/exemptions, the ADR holders will be issued additional ADRs representing the Wipro Limited equity shares that they would otherwise receive pursuant to the scheme of arrangement. Where such approvals/exemptions are not forthcoming or are not received prior to the record date for the demerger, we expect that the depository with respect to the ADRs will, subject to compliance with applicable laws and the terms of the deposit agreement, sell the equity shares of Wipro Limited that ADR holders would otherwise be entitled to receive, and distribute the proceeds thereof to the ADR holders. The demerger is anticipated to also assist Wipro Limited in increasing public float for the purpose of the meeting the minimum public shareholding requirement under clause 40A of its listing agreement subject to SEBI approval. The Valuation process was jointly undertaken by Deloitte Touche Tohmatsu India Private Limited and N. M. Raiji & Co, while fairness opinions were provided by JM Financial Institutional Securities Private Limited and Citigroup Global Markets India Private Limited. JM Financial also acted as the sole financial advisor to Wipro Limited. About Wipro Limited (NYSE: WIT) Wipro provides comprehensive IT solutions and services, including systems integration, Information Systems outsourcing, IT enabled services, package implementation, software application development and maintenance, and research and development services to corporations globally. Wipro Limited is the first PCMM Level 5 and SEI CMM Level 5 certified IT Services Company globally. Wipro also has a strong presence in niche market segments of Infrastructure Engineering and Consumer Products & Lighting. For more information, please visit our websites at Contacts: Media Vipin Nair Head Communications, Wipro Limited vipin.nair1@wipro.com Investors Aravind Viswanathan, Investor Relations, Wipro Limited aravind.viswanathan@wipro.com Wipro's forward looking and cautionary statements The forward-looking statements contained herein represent Wipro s beliefs regarding future events, many of which are by their nature, inherently uncertain and outside Wipro s control. Such statements include, but are not limited to, statements regarding Wipro s growth prospects, its future financial operating results, and its plans, expectations and intentions. Wipro cautions readers that the forward-looking statements contained herein are subject to risks and uncertainties that could cause actual results to differ materially from the results anticipated by such statements. Such risks and uncertainties include, but are not limited to, risks and uncertainties regarding fluctuations in our earnings, revenue and profits, our ability to generate and manage growth, intense competition in IT services, our ability to maintain our cost advantage, wage increases in India, our ability to attract and retain highly skilled professionals, time and cost overruns on fixed-price, fixed-time frame contracts, client concentration, restrictions on immigration, our ability to manage our international operations, reduced demand for technology in our key focus areas, disruptions in telecommunication networks, our ability to successfully complete and integrate potential 5

6 acquisitions, liability for damages on our service contracts, the success of the companies in which we make strategic investments, withdrawal of fiscal governmental incentives, political instability, war, legal restrictions on raising capital or acquiring companies outside India, unauthorized use of our intellectual property, and general economic conditions affecting our business and industry. Additional risks that could affect our future operating results are more fully described in our filings with the United States Securities and Exchange Commission, including, but not limited to, Annual Reports on Form 20-F. These filings are available at We may, from time to time, make additional written and oral forward-looking statements, including statements contained in the company s filings with the Securities and Exchange Commission and our reports to shareholders. We do not undertake to update any forward-looking statement that may be made from time to time by us or on our behalf. 6

FOR IMMEDIATE RELEASE

FOR IMMEDIATE RELEASE Results for the quarter ended September 30, 2013 under IFRS IT Services Revenue Crosses ` 100 billion per quarter IT Services Operating Margin Expands by 2.5% sequentially Wipro Delivers 28% YoY Net Income