Wipro Expecting An Acceleration in E&IS from Q3 Onward
During its Q2 FY20 earnings call, Wipro provided some light about the performance of its Industrial & Engineering Services (E&IS) unit.
It is not so long ago that Wipro was corporate India’s strongest name for ER&D services, mostly servicing clients in the network equipment provider (NEP) industry and also semiconductor manufacturers.
The company has become less visible in the ER&D space, over-taken by HCL Tech, which has combined acquisitions and substantial organic growth. Today, E&IS is a USD 600m business, now much smaller than HCL Tech’s ERS, which has revenues of approximately USD 1,600m.
In the past years, Wipro has under-performed the market: ER&D revenues were flat in FY18, rebounding to +5.4% (at CC) in FY19. The reasons for this subdued performance are not entirely clear. From the evidence we have gathered, it seems that E&IS suffered from its positioning on the NEP industry and the recent downturn in semiconductors.
E&IS has taken actions and is leading two initiatives: it has refreshed its portfolio and launched Engineering NXT, which includes, we understand, IoT, and digital manufacturing along with sector-specific offerings such as ADAS.
Engineering NXT is genuinely a priority for Wipro, and we should hear more from it soon. It is one of Wipro’s big bets along with digital, cloud, and cybersecurity. So Engineering NXT is strategic to Wipro.
In parallel with its portfolio refresh, E&IS is diversifying its client base manufacturing, with a focus on automotive and medical device manufacturers. This expansion in the manufacturing sector is essential to E&IS and for Wipro overall.
In Continental Europe, Wipro has not diversified enough its client base and services clients in banking, capital markets, and manufacturing. Both banking & capital market and manufacturing sectors have been under pressure, and Wipro believes it can resume growth among manufacturing clients, thanks to E&IS and new application services (think SaaS applications and agile development).
So far, Wipro’s revival plan for E&IS is only being implemented, and the financial performance of E&IS has been mixed. While Q1 FY20 was off to a good start (+7.0% at CC), Q2 slowed down significantly (-0.9% at CC). Wipro is confident that E&IS will accelerate its growth in H2 FY20 (we understand it targets +6% in H2).
Also, we are seeing Wipro is ready to invest: the company completed the acquisition of a US PLM service specialist ITI. ITI is a small firm, with USD 23m in revenues, so ITI will not change much to E&IS financial performance. However, we are positive on this acquisition and believe other M&As will follow this transaction and accelerate E&IS’ portfolio and client base transition.