- Wipro is replaced by BSE in the Nifty 50 index due to market cap changes
- Wipro's market cap remains higher than BSE's despite index exclusion
- Wipro stock trades below its dotcom peak even after stock splits and bonuses
The National Stock Exchange (NSE) recently announced the semi-annual rebalancing of the Nifty 50 index, with BSE replacing Wipro in the country's front-line stock index.
Index inclusions are dictated by free-float market capitalisation and therefore cannot be seen as a straightforward verdict on a company's growth story, or lack thereof – in fact, Wipro's total mcap at Rs 1.6 lakh crore still sits above BSE's at Rs 1.26 lakh crore.
But it comes at a time where over the past few years, IT stocks, and the market in general, have clocked lukewarm returns.
Against this backdrop comes the performance of Wipro. Among India's top five IT services companies, Wipro has fallen the most over each of the past one-year and five-year timeframes.
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But what's more interesting is that the company's stock is still trading below the high it clocked during the dotcom peak in the year 2000 – and this is after adjusting for stock splits and bonuses.
Why The Long-Term Under Performance
In the late 90s, IT companies were seen as the gamechanger that AI companies are today. After all, the world was about to get super-connected, as it did, which would ease trade and services barriers globally as it happened.
IT companies were the driving force behind the digitisation of every company in the world, and sure enough, investors were excited about the story.
One of the poster boys of this movement was Wipro. Between 1991 and 2001, its sales had grown nearly 10 times from Rs 391 crore to Rs 3,092 crore while profit had jumped ~58 times from Rs 11.4 crore to Rs 666 crore.
But the excitement over its growth story meant that the stock went stratospheric. At its February 2000 peak before the winter on dotcom stocks set in, it commanded a market cap of Rs 2 lakh crore. At its peak, it traded at 700 times trailing earnings.
The dotcom winter was the effect of the realisation that irrespective of the impact that a company or a sector will have on the world, it is the growth rate of its cash flows that matters in the long term. And that once speculative buying – people chasing momentum – stops, stocks that are trading at lofty valuations will get hit the most because even a high-growth company cannot grow at the rate at which the market expects it will grow.
And sure enough, even after the market fell out of love with IT stocks, Wipro turned in decent performance.
Over the past 25 years, its revenues have grown from about Rs 3,000 crore to around Rs 71,000 crore now, while profit jumped from Rs 666 crore to over Rs 12,000 crore. That's an annualised growth rate of 13.4% and 12.3%, respectively. Respectable by any standards.
But instead of paying 700 times of its profit, the market now only wants to give the company a valuation of a mere 12 times. Which explains why its mcap is 20% lower than what it was sometime in February 2000.
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