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Neutral Wipro Ltd For Target Rs.710

Solid 2QFY22 beat and in line 3Q guidance

Demand tailwind already baked into valuation

* WPRO reported a strong (8.1% QoQ CC) revenue growth in IT Services in 2QFY22, ahead of our estimate of 6.9%. Organic growth (excluding Capco) of 4.5% QoQ also came in ahead of our estimate. The management highlighted that the growth was broad based in 2QFY22, including at Capco, which it is delivering ahead of plan.

* Despite a M&A impact and wage hike, EBIT margin in IT Services was flat QoQ (excluding a one-off in 1QFY22) at 17.8%, 170bp ahead of our estimate. It reported a TCV of USD580m in 2QFY22, down 19% QoQ. Deal TCV is up 19% YoY in 1HFY22.

* WPRO’s operational metrics remain impacted by supply tightness, with attrition increasing by 500bp QoQ to 20.5% and utilization (excluding trainees) of 89.2% (+240bp QoQ), despite adding 11.5k employees (5.5% of its 1QFY22 strength). The management expects attrition to further inch up in 3QFY22 and said it will take a few quarters to normalize.

* 3QFY22 revenue growth guidance of 2-4% QoQ (including impact of Ampion acquisition) was in line with our estimate. We see the guidance as positive, given the supply constraints and seasonality, but remain watchful on margin as the company continues to operate ahead of its guidance of 17-17.5%.

* We now expect FY22 IT Services’ revenue growth at 28% (19.5% YoY organic growth). With better than expected margin performance, we have raised our FY22E/FY23E EBIT margin estimate by 100bp/30bp, which will result in a FY21-23E PAT growth of 13%.

* The management’s growth strategy, continued investment in talent, and a simplified operational model to help improve the focus on customers has started to play out and will support valuation, but the current valuation of 27x FY23E P/E is fairly baking in this improvement.

* We upgrade our FY22E/FY23E EPS estimate by 7%/2% to factor in a better growth performance. We maintain our Neutral stance as we view the current valuation as fair. Our TP implies 28x FY23E EPS.

Strong beat on operations

* In USD terms, revenue grew 29.5% YoY (est. 28.7%), IT Services’ EBIT rose 21.4% (above our estimate), and PAT grew 19% (est. 8%) in 2QFY22.

* For 1HFY22, USD revenue/INR EBITDA/INR PAT grew by 28%/25%/27%.

* Revenue form IT Services grew 8.1% QoQ CC to USD2,580m, above our estimate and on the higher side of the management’s guidance of 5-7%.

* Organic sequential growth posed by the company stood at 4.5% QoQ.

* Sequential growth was led by BFSI (+12.5% QoQ CC), Communications (+8.9%), Consumer (+7.7%), and Health (+5.5%).

* Growth was broad based across the US and Europe. APMEA saw a 9.6% QoQ CC growth in 2QFY22.

* WPRO had a large deal TCV of over USD580m.

* IT Services’ EBIT margin was flat QoQ at 17.8% (170bp above our estimate).

* PAT grew 19% YoY to INR29b, a 10% beat to our estimate led by higher operating income.

* Utilization/attrition rose 240bp/500bp QoQ. WPRO saw a net addition of 11.5k employees in 2QFY22.

* OCF for 1HFY22 stood at INR57.4b, implying an OCF/PAT of 93%, while FCF stood at INR47b, implying a FCF/PAT of 76%.

* For 3QFY22, the management guided at CC revenue growth between 2% and 4% sequentially.

Key highlights from the management commentary

* Majority of the growth was volume led and was across sectors and markets.

* Deal pipeline is at a record high and has a good mix of large and mid-size deals.

* The Engineering business grew 25% YoY in 2Q, its CQGR over the past four quarters is ~5%. The Cloud business grew 27% YoY in 1HFY22, with the pipeline crossing USD8b.

* The management continues to build good momentum on go to market with Capco. It has started winning some deals. There have been 10 deal wins since the closure of the acquisition.

* It has been building a strong leadership team closer to clients. Around 58% of its leadership team is in regional markets, with increased proximity to clients. About 8% of top 200 leaders are global account executives (v/s ~1% earlier). There is a change in mix of leadership towards client facing people.

* In 1HFY22, ACV/TCV witnessed 28%/19% YoY growth.

Valuation and view – aptly priced

* In the past few years, WPRO has underperformed Tier I companies on growth due to its higher exposure to challenged verticals (such as Healthcare and ENU). Changes at the company level (restructuring in India/Middle East) have further constrained growth. We expect the refreshed strategy of the new management to make the organization leaner. Its growth-focused and client-centric approach would aid growth over the medium-to-long term.

* We increase our FY22E/FY23E EPS by 7%/2%. We maintain our Neutral stance as we await: a) further evidence of execution of WPRO’s refreshed strategy, and b) successful turnaround from its growth struggles over the last decade before turning more constructive on the stock. Our TP implies 28x FY23E EPS.

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