Wipro to demerge non-IT businesses: Why now?

These days, we tend to use the term 'New Normal' when we talk about IT Services companies. There's a feeling that the momentum associated with the sector during its early years is lost, and that we have to brace for slower growth and smaller margins.

But, in early 2000s, almost everyone referred to it as a 'Sunrise Sector', There was a recognition that outsourcing was a huge wave, and that, for companies such as TCS, Infosys, Wipro which had caught on it early on, the best years were still ahead.

To investors at that time, Wipro holding on to 'old economy' businesses such as consumer products and lighting seemed like a drag. A constant question during those years was: why don't they sell them off, and invest that to grow the IT business? But then, Wipro seemed to be sentimentally attached to its non-IT businesses. After all, those businesses helped fund its IT venture in the first place. Besides, they gave decent returns on investment.

Over the years, investors simply stopped asking. Nevertheless, the answer came this morning.

Wipro announced it will demerge its non-IT businesses - Wipro Consumer Care & Lighting, Wipro Infrastructure Engineering, and Medical Diagnostic Product & Services business, which together account for 14% of revenues and 6% of operating profit - into a separate company named Wipro Enterprises.

Wipro will exclusively focus on IT business, and remain listed. Wipro Enterprises will be unlisted. In a press release, the senior executives spoke about the benefits of separating the two: there will be more focus. (The press statement is here)

But why, after all these years, now?

Two reasons: One, while IT business accounts for 86% of revenue and 94% of operating profit for Wipro, its other businesses are growing fast, and some of them have achieved scale. Senior managers at Wipro like to point out the market share of its brands like Santoor. It has been expanding that portfolio: it acquired Yardley's business in UK and a few European markets earlier. Importantly, Azim Premji believes its non-IT business, especially environment and sustainability can grow big. Check out my colleague Mitu Jayashankar's piece The Inside Story of Azim Premji's Next Billion Dollar Plan here.

Two, Premji is facing the June 2013 deadline of having to increase Wipro's public float to 25%. Wipro says the demerger will assist in increasing the public float. It's not clear how exactly this will happen. (A JP Morgan note to its clients says one of the swap options will decrease the promoter holding marginally.) Wipro is holding a telephonic press briefing at 1230 PM today. We will keep you posted.

The thoughts and opinions shared here are of the author.