Revenue Miss along with Margin Pressure
Wipro's (WPRO) 3QFY22 IT services revenue grew by 2.3% QoQ to US$2.6bn, 2.3% below our estimate of US$2.7bn. Sequential growth came at 3% in CC terms (organic 3.3%), below our estimate of 4%, driven by organic growth. EBIT margin of IT services business is at 17.6%, broadly in line with our estimate of 17.5%, driven by a higher operating leverage, despite high attrition rate. Net income stood at Rs29.7bn, 2% below our expectation of Rs30.5bn, due to margin pressure and below expected revenues. 11 Large deal TCV signed with a combined TCV of over US$600mn in 3QFY22. The company remained optimistic on the demand environment, which was encouraging. Management guided for 3QFY22 revenue from IT Services business to be at US$2.69-2.74bn. This translates into a sequential growth of 2-4%. We expect the recent restructuring efforts, which include a simplified operating structuring, step-up in capability upgrade and talent management to bode well for WPRO in the medium term. However margin pressure would continue. We lower FY22E-FY24E EPS estimates by 0.3-1.7%, factoring weak margin profile. We retain the BUY recommendation and lower the target price to Rs720 (vs. the prior Rs760) and value the stock at 25x (earlier 26x) FY24E earnings.
Attrition to Inch Up in Coming Quarters
(1) Among verticals, growth was led by Consumer (4.7% QoQ), Health (3.7% QoQ), banking, financial services and insurance (3.5% QoQ), manufacturing (1.9% QoQ) and communications (1.8% QoQ). (2) Among geographies, growth was particularly strong in Americas 1 (5.1% QoQ) and APMEA (2.5% QoQ). (3) Voluntary TTM attrition in IT services stood at 22.7%, compared to 20.5% in 2QFY22. Management expects attrition to moderate in the next couple of quarters and then ease out in FY23. (4) During 3QFY22, the company added a net work force of ~10k employees. (5) US$100mn+ client bucket and US$50mn+ client bucket grew to 17 and 47 respectively in 3QFY22.
Execution Remained Better Than Expected
EBIT margin of IT services business came in at 17.6%, broadly in line with our estimate of 17.5%, driven by a higher operating leverage and lower-than-expected integration cost of recent acquisitions. We expect a limited margin upside for FY22 due to the higher SG&A cost (higher attrition and resumption of offices), rising attrition levels and accelerated hiring over the next two quarters. We estimate an EBIT margin of 17.5-17.8% over FY22E-FY24E.
Lower Margin Profile and Growth Moderation; Lower Valuation Multiple
At CMP, WPRO trades at 25.2x/22.2x FY23E/FY24E EPS, which is at 10% discount to the larger peers (TCS and Infosys). Restructuring efforts, which include a simplified operating structuring, step-up in capability upgrade and talent management bode well for WPRO in the medium term. While the company lagged on the revenue growth front vs. larger Indian peers historically, we expect WPRO's revenue to clock 18.5% (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. However, factoring lower revenue growth and margin pressure, we slightly reduce valuation multiple from 26x to 25x. In view of strong deal wins and healthy earning CAGR, we retain our BUY recommendation with target price of Rs720 (from earlier Rs760), valuing the stock at 25x FY24E earnings.
Link to the report
Shares of Wipro Limited was last trading in BSE at Rs. 639.80 as compared to the previous close of Rs. 649.85. The total number of shares traded during the day was 979629 in over 58233 trades.
The stock hit an intraday high of Rs. 649.80 and intraday low of 636.50. The net turnover during the day was Rs. 627748467.00.