Wipro - 2QFY22 Result Update - Continued Growth Outperformance; Raise TP to Rs760 - Reliance Research

All-round Beat on Revenue Growth and EBIT Margin

Wipro's (WPRO) 2QFY22 IT services revenue grew by 6.9% QoQ to US$2.58bn, 0.7% ahead of our estimate of US$2.56bn. Sequential growth came in at 8.1% in CC terms (organic 4.5%), ahead of our estimate of 6.6%, driven by a solid broad-based organic growth and higher-than-expected contribution from acquisitions (Capco and Ampion). EBIT margin of IT services business is at 17.7%, above our estimate of 17.3%, driven by a higher-than-expected operating leverage. Net income stood at Rs29.3bn, 2.8% ahead of our expectation of Rs28.5bn, led by the higher revenue growth and better margins. Large deal TCV (deals of more than USS$30mn) came in at US$580mn, which was slightly softer. The company remained optimistic on the demand environment, which was encouraging. Management guided 3QFY22 revenue from IT Services business will be at US$2.63-2.68bn. This translates to a sequential growth of 2-4%, which was ahead of our estimate of 1.5-3.5%. We expect the recent restructuring efforts, which include a simplified operating structure, step-up in capability upgrade and talent management to bode well for WPRO in the medium term. We raise FY22E-FY24E EPS estimates by 12.7-15.6% (previous note of Mar'21), driven by an improved revenue growth visibility and margin profile. We retain our BUY recommendation and raise the target price to Rs760 (vs. the prior Rs565) and value the stock at 26x (earlier 22x) FY24E earnings.

Attrition to Inch Up Higher in Coming Quarters

1) Among verticals, growth was led by, financial services and insurance (12.5% QoQ), communication (8.9% QoQ) and consumer (7.7% QoQ). 2) Among geographies, growth was particularly strong in Europe (9.2% QoQ) and APMEA (9.6% QoQ). 3) Voluntary TTM attrition in IT services stood at 20.5%, compared to 15.5% in 1QFY22. Management expects attrition to rise in the next couple of quarters and then ease out. 4) During 2QFY22, the company added a net work force of ~12k employees. 5) US$100mn+ client bucket and US$50mn+ client bucket grew by 2 each to 15 and 44, respectively.

Execution Remained Better Than Expected

EBIT margin of IT services business came in at 17.7%, above our estimate of 17.3%, driven by a higher-than-expected operating leverage and lower-than-expected integration cost of recent acquisitions. During the quarter, WPRO also accounted the salary increment for 80% of employees. We expect a limited margin upside for FY22 due to the higher SG&A cost (higher attrition and resumption of offices), rising attrtion levels and accelerated hiring over the next two quarters. We estimate an EBIT margin of 18.2-19% over FY22E-FY24E.

Industry Leading Growth Deserves Multiple Rerating

At CMP, WPRO trades at 26.5x/23x FY23E/FY24E EPS, which is at 6% discount to the larger peers (TCS and Infosys). Restructuring efforts, which include a simplified operating structure, step-up in capability upgrade and talent management bode well for WPRO in the medium term. We expect WPRO's revenue to clock 15.9% (including acquisitions) CAGR over FY21-FY24E vs. 4% CAGR over FY17-FY20, driven by the recent large deal wins and focused efforts on prioritized sectors/geographies. Thus, we retain the BUY recommendation. We have shifted to a 1-year target price from the earlier 2-year. As we enter 2HFY22, instead of rolling forward the valuation, we maintain it based on FY24E earnings and shift to a 1-year target price of Rs760.

Link to the report

Shares of Wipro Limited was last trading in BSE at Rs. 707.55 as compared to the previous close of Rs. 672.55. The total number of shares traded during the day was 1883326 in over 35751 trades.

The stock hit an intraday high of Rs. 739.80 and intraday low of 695.00. The net turnover during the day was Rs. 1351463549.00.

Source : Equity Bulls

Keywords

Wipro INE075A01022 RelianceResearch Q2FY22 ResultUpdate