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In-line revenue performance; margin surprises positively

* Wipro reported in-line revenue at USD2.1bn (3.4% QoQ CC). IT services EBITM surprised positively, expanding 240bps QoQ to 21.7% (270bps ahead of our expectations), led by revenue acceleration, high offshoring (52.7% vs 50.4% QoQ) and operating efficiencies.

* The new simplified and leaner operating model was implemented across the organization from Jan 1, 2021, under which the number of P&Ls will be reduced to 4 from 26. It will help in faster decision making, more effective go-to-market and client centric approach.

* The company has guided IT Services revenue to be in the range of USD2,102-2,143mn in Q4, implying 1.5% to 3.5% growth QoQ. It expects salary hike and investments in frontend sales and domain capabilities to impact margins in Q4.

* We raise FY21/22/23E EPS by 9.7%/10.9%/10.4% as we factor in Q3 performance, better EBITM and robust deal signings. Wipro has shown better performance in Q3; however, weakness persists in client metrics. Given rich valuations and patchy performance in the past, we maintain Hold with a revised TP of Rs420 (earlier Rs 380).

What did we like?

Broad-based sequential revenue growth, 240bps expansion in IT Services EBITM, healthy deal intake (USD1.2bn TCV), cash conversion (106% OCF/EBITDA).

What did we not like?

Continued weakness across client buckets

Broad based growth performance:

Revenue grew 3.9% QoQ to USD2.1bn (CC 3.4%) in Q3, highest sequential revenue growth in last 36 quarters. Revenue growth was broad based across verticals and service lines in Q3, led by ENU (5.6% QoQ), Healthcare (5.5% QoQ), Manufacturing (5.2% QoQ), Consumer (5.2% QoQ) and Technology (4.8%) verticals. Communications (2% QoQ) and BFSI (1.6% QoQ) grew slower in Q3FY21. From geographic perspectives, growth was led by Europe (10.1% QoQ) and US (2.5% QoQ). Wipro is seeing steady improvement in demand, especially for digital transformation, digital operations, and cloud services. Wipro has closed 12 deals with over USD30mn TCV (including USD700mn deal with Metro AG) and the TCV booked of these deals was over USD1.2bn in Q3 (grew in double digits YoY).

EBITM expanded by 240bps QoQ:

IT Services’ EBIT margin expanded by 240bps QoQ to 21.7%, which was a 22-quarter high, driven by revenue acceleration, offshoring (up by 230bps QoQ / 590bps YoY), healthy utilization and favorable currency (+30bps). Wipro plans to give salary hikes, effective Jan 1. It expects salary hikes, investments in front-sales and domain capabilities to impact margins in Q4; however, revenue acceleration and offshoring would support margins. Wipro sees scope of further 100-150bps expansion in utilization.

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