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Organic engines yet to fire

* Wipro (WPRO)’s FY23 Annual Report (AR) highlights that enterprises are doubling down on reprioritizing spends to achieve operational excellence and cost takeout programs, while strongly focusing on reducing discretionary spends.

* The selective pockets – BFS, Hi-Tech, Retail and Consumer – are exhibiting signs of caution in their technology spends due to lingering inflation and weak consumer spending.

* Conversely, demand in Telecom appears positive, where clients are reprioritizing spends to monetize their 5G investments. Additionally, Healthcare, Utilities and Automotive are showing strong resilience amid the adverse macro situation.

* Although the company has signed 55 large deals with an overall TCV of USD3.9b (+66.5% YoY), the deal conversion remains a challenge with large deal timelines witnessing extensions and creating near-term leakages.

Key verticals in shape

* In FY23, WPRO’s revenue grew 11.5% YoY in constant currency (CC), attributed to Consumer/Manufacturing/BFSI segments (up 18.3%/12.7%/12.5 YoY in CC).

* Consumer vertical’s growth was partly supported by the acquisition of Rizing that consolidated at the beginning of FY23. The inorganic contribution has been estimated at 2.1% to the overall revenue during the year.

* Geography wise, almost all the regions have reported double-digit growth with Americas 1 and Europe leading the pack at 12.7% and 12.1% CC growth.

Margins moderate further in FY23

* WPRO reported an operating margin of 15.4% in FY23, down 200bp YoY. The contraction in margin was primarily due to: 1) intense compensation revision and promotions, 2) headcount additions (including 22k freshers), 3) increase in traveling costs, and 4) higher software license expenses.

* On a segmental basis, IT Service’s (99% of revenue) margin stood at 15.7% in FY23 vs. 17.7% in FY22. Conversely, IT Products and ISRE’s margins stood at -2.9% and 7.6% in FY23 vs. 1.9% and 16.1% in FY22, respectively.

* The subcontractors’ percentage of revenue was at 12.7% (down 100bp YoY). The subcontracting is likely to normalize going ahead with waning supply-led challenges and moderating attritions.

Cash conversion robust

* WPRO’s cash conversion remained strong; while pre-tax OCF/EBITDA came in at 95.1%, FCF/PAT stood at 102.5% in FY23.

* The company generated ROE and ROCE of ~16% and ~13% in FY23 vs. ~20% and ~16% in FY22, respectively.

* WPRO’s payout ratio (trailing three years) remained at 46.7% in FY23, which has been in line with its capital allocation policy of returning at least 45-50% of net income for a period of trailing three years.

* FY23 Net Cash & Cash Equivalent stood at INR273b, translating into 13.6% of market cap.

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