Wipro De‐merger of consumer business ::Prabhudas Lilladher

Wipro announced 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 IT. We see demerger a ROCE accretive for the IT business. However,
we do not expect material upside due to demerger.

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􀂄 The current state of LCC business: LCC contributes ~14% of revenue ($676m) to
Wipro with Gross Margin of 43.3% (Rs14.46bn, ~13% of total gross profit) and
EBIT margin of 11.8% (Rs3.96bn, ~6% of total operating profit). Return on
Capital Employed for LCC business is ~17.5% against overall ROCE of ~20%.
􀂄 The option for the shareholders: The options for shareholders: 1) 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 2)
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;
3) 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. Each Redeemable Preference Share shall
have a maturity of 12 months and shall be redeemed at a value of Rs.235.20
􀂄 Valuation & Recommendation ‐ Value unlocking??: FMCG business for Wipro
has been dilutive for overall performance. The growth for FMCG (Operating
Income YoY growth FY12: 14.6%, FY11: 11.3%) business has been in-line IT
Services (FY12: 11%, FY11: 11.4%). Wipro is currently trading at 13.5/12x
FY13E/FY14E. Indian FMCG companies, which has ROCE in the range of 20-60%+
and growth ranging from 15%+, are commanding P/E of ~25-30x. But for Wipro’s
LCC growth and ROCE is lower than its peers. We expect FMCG business to
command a P/E of ~20x, hence resulting in limited upside due to de-merger.