: In July 2001, Wipro Technologies bagged a significant $70-million systems integration contract from the telecom subsidiary of the UK-based Lattice Group Plc, an FTSE 100 company.

Not only was systems integration higher up the value chain, this major contract was expected to be a good reference point for bagging other such contracts. But over the next six quarters, it was unable to bag any other systems integration contract.

To precipitate matters, in the third quarter of 2002-03, this telecom subsidiary of Lattice group was acquired by another company. And the new company has put everything on hold.

Out of $70-million contract, only $46 million had been executed and the rest is likely to remain in abeyance for some time.

For instance, in the fourth quarter, Wipro assumed zero billing from the Lattice group contract.

While this contract helped enhance its portfolio of service offerings, it has been able to derive only limited mileage from this experience so far.

Similarly, Wipro Technologies aimed to build on its expertise in IT infrastructure solutions by inducting Mr Steve Zucker in July 2002.

Formerly with EDS, Mr Zucker was expected to use the experience of two decades in sales at EDS to bag and execute large, multi-year and comprehensive IT infrastructure-outsourcing contracts for Wipro Technologies. But in less than nine months, in February, Mr Zucker quit with hardly any significant wins for credit.

Acquisitions: On the acquisition front, 2002-03 will go down as an aggressive year in Wipro's recent history. In the Wipro Technologies domain, the two key purchases were the R&D business of Ericsson India, initiated in September 2002, and the global energy and utilities practice of American Management Systems (AMS) Inc, US, in November 2002. These are expected to strengthen the R&D services practice and the energy vertical of Wipro Technologies.

Stemming from these and other acquisitions this year, Rs 500 crore appears as goodwill (which is the excess consideration paid over the book value of assets) in the consolidated Wipro's balance-sheet.

From a medium-term perspective, these acquisition moves are encouraging and their integration has also been going according to plans so far. However, managing them successfully in the long-term enhances the overall risk profile of the company.

Clearly, the attempts to move up the value chain have yielded limited dividends so far. In turn, their impact on stemming the decline in PBIT margins has hardly been successful. Wipro Technologies recorded the fifth consecutive quarter of PBIT margin decline in the fourth quarter of 2002-03.

At 24.6 per cent, it touched the lowest level in the last six quarters and is almost 10 percentage points lower than 34.3 per cent recorded in the third quarter of 2001-02.

Recommendation: The Wipro management has projected an almost flat revenue guidance of $172 million (Rs 816 crore) for Wipro Technologies in the first quarter of 2003-04.

Considering this flat guidance and the possibility of further erosion in margins, it may be advisable for investors to sell their holdings in Wipro on an uptrend. They can contemplate a re-entry into the stock after examining the earnings performance for the first quarter. Considering that the software services sector is in a state of churn currently, it appears that the price-earnings multiple of the sector may take a while to stabilise.

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