Bangalore: Country's third largest software firm Wipro Thursday said it will demerge its non-IT businesses into a new company, a move which will allow it to focus exclusively on information technology.
The new unlisted firm will be called Wipro Enterprises and include Wipro Consumer Care & Lighting (including furniture business), Wipro Infrastructure Engineering (hydraulics and water businesses) and Medical Diagnostic Product & Services business.
Following the move, shares of the IT major surged nearly 7 percent in morning trade. The company's scrip closed at Rs 361.40, up 3.02 percent from the previous close on BSE.
Wipro Limited CFO Suresh C Senpaty said the demerger will improve the profit margins.
"Wipro's IT business has delivered higher margins than the overall Wipro margins. The demerger will only help us to improve our profit margins," he told reporters on a conference call.
Wipro Ltd would continue to remain a publicly listed company focussing exclusively on IT, while Wipro Enterprises will be an unlisted company.
Stating that Wipro's multiple businesses are not necessarily big enough to go through the process of listing and sustaining it, Senapaty said, "This is one of the reasons why we took a decision that IT business becomes a pure play and remaining businsses become diversified entities."
The Board of Wipro will remain unchanged and the demerger of the non-IT units will have no impact on the company's management structure, Wipro said in a statement.
The demerger will help Wipro to focus on IT, which accounted for close to 90 percent of the total revenues for the quarter ended June 30, 2012.
"It (demerger) will help in simplication, clarity in the minds of customers, target companies, investors and analysts. That is why we think the competitiveness of Wipro Limited will improve," Senapaty said.
Wipro, which is a part of the USD 100 billion Indian IT industry, competes with the likes of Tata Consultancy Services and Infosys besides global players like IBM and Accenture.
"Creating a technology-focused company will allow us to better serve the needs of our customers and accelerate investments necessary to capitalise on market growth opportunities," Wipro CEO, IT Business and Executive Director, T K Kurien said.
With increased focus on its core business, Wipro is expected to better compete as the sector is witnessing stiff competition amid flat IT budgets due to economic slowdown.
There will be no change in the leadership of any of Wipro Enterprises' constituent businesses as well and Wipro brand will be jointly owned by both the companies.
Azim Premji will remain Executive Chairman of the Board of Wipro and will assume the position of Non-Executive Chairman of Wipro Enterprises.
"I am confident that the demerger will enhance value for our shareholders and provide fresh momentum for growth. Each of our distinct businesses is best of breed in its respective industry and we are committed to both the businesses," Premji said.
The date of demerger has been fixed at April 1, 2012, and is expected to be completed by the next financial year, subject to regulatory approvals.
Market analyst firm Espirito Santo Securities, in its report, said the demerger process values the newly formed Wipro Enterprises at Rs 10,900 crore.
"Sebi regulations make it clear that by May 2013, the promoter holding in any listed company cannot exceed 75 percent. Wipro's current promoter holding stands at 78.3 percent and post this transaction will fall to 75.7 percent. We think it is a smart move to comply with regulations," the report said, adding the deal looks fair to minority shareholders.
Under the proposed restructuring scheme, resident Indian shareholders of Wipro Ltd have three options -- 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.
Under the second option, shareholders will 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.
The third option is exchange of the equity shares of Wipro Enterprises, to receive as consideration, equity shares of Wipro Limited held by the promoter.
The exchange ratio will be one equity share in Wipro Ltd for every 1.65 equity shares in Wipro Enterprises Ltd.
Each redeemable preference share will have a maturity of 12 months and shall be redeemed at a value of Rs 235.
Non-resident shareholders (excluding ADR holders) and ADR holders on the record date would be entitled to receive equity shares of Wipro Enterprises in the aforesaid ratio, the filing said.
The Non-resident shareholders (excluding ADR holders) shall further have the option to exchange the Wipro Enterprises' equity shares that they are entitled to and receive equity shares of Wipro Ltd held by the promoter in the aforesaid ratio.
According to the restructuring scheme as currently proposed, Wipro Enterprises equity shares, that the ADR holders would otherwise be entitled to receive shall be compulsorily exchanged for equity shares of Wipro Ltd held by the promoter in the aforesaid ratios.