Hiving off non-IT will improve Wipro's profit margins

Profit margins for Wipro Ltd will improve after the low-margin, non-IT businesses are demerged into a separate private company, CFO Suresh Senapaty said in a conference call today.

The company had in the morning announced the demerger to the stock exchanges, pushing the share prices up about 7 percent earlier.

The news came as positive news for the stock as investors had been asking for such a move for some time now.

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However, when asked about the timing of the announcement, director N Vaghul said that the board has been waiting for the non-IT company to reach a critical mass. The decision was taken as the board felt that has happened now, he said.

According to the press release sent earlier, as part of the proposed restructuring, resident Indian shareholders of Wipro Ltd have three options:

One, receive one equity share with face value of Rs 10 in Wipro Enterprises for every five equity shares with face value of Rs 2 each in Wipro that they hold.

Two, they can receive one 7 percent redeemable preference share in Wipro Enterprises with face value of Rs 50, for every five equity shares of Wipro Ltd that they hold.

Three, exchange the equity shares of Wipro Enterprises and receive as consideration equity shares of Wipro Ltd held by the promoter, the filing noted.

If all investors opt to exchange Wipro Enterprises shares, the resultant dilution of promoter equity in Wipro is seen at 2.7 percent, Senapaty said.

We believe the scheme gives 12% additional shares to existing shareholders for a business which contributes 4% to PBIT (FY12) valuing it at 26x FY12 PBIT. We believe the scheme is positive for shareholders," brokerage Edelweiss said in a flash note today.