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Disconnect between order book and growth concerning

Remain Neutral on inexpensive valuation

* WPRO reported 3QFY23 IT Services revenue growth of 0.6% QoQ CC (in line) due to weak macro and furloughs. Despite the easy 3Q comp (among the weakest topline growth in our large cap IT services coverage) and strong order intake (USD4.3b, 1.5x book-to-bill), WPRO has guided for a muted 4Q USD CC revenue growth of -0.6% to 1.0% QoQ. ? Q3 EBIT margin in IT Services was up 120bp QoQ to 16.3%, ahead of our expectation of 15.4% due to better employee cost control and the reversal of one-off costs incurred last quarter.

* We were disappointed by WPRO’s weak implied 4QFY23 revenue growth guidance, given the continued strength in deal momentum over the last few quarters. Management indicated that near-term deal conversion was affected by slower decision-making (macro overhang) and a longer tenure (4-5 years) of transformation deals, especially the ones with hyperscalars (44% contribution of the total TCV).

* Management, however, remains optimistic that the strong deal pipeline and robust order bookings will continue in 4Q, which should help WPRO deliver better growth in FY24. Given the tepid conversion of strong TCV over the last 6-8 quarters, we are concerned that growth challenges might continue and WPRO may lag its peers even in FY24 in terms of revenue/earnings growth. We are factoring in a USD revenue CAGR of 7.3% over FY22-25, among the lowest in our IT Services coverage.

* In terms of margins, the company exceeded our expectations by 90bp QoQ and delivered 16.3% (IT service EBIT) despite two months of wage hikes and promotions at senior levels. Management remains confident to sustain margin at the 3QFY23 level and indicates further improvement over a new base. We expect FY23/FY24/FY25 margins to be 15.5%/16.4%/17.0%, which should translate to a 6.6% CAGR in INR PAT over FY22-25 – among the lowest in our IT Services coverage.

* We raise our FY23 and FY25 EPS estimate by 4% but lower our FY24 EPS estimate marginally to factor in weaker growth next year due to a lower exit rate in 4Q. We maintain our Neutral stance as we view the current valuation as fair. Our TP implies 16x FY24E EPS

In-line 3Q revenue, margin beat; weak 4Q guidance

* In 3QFY23, revenue from IT Services grew by 0.6% QoQ in CC terms, INR EBIT was up 6% YoY, and INR PAT increased by 2.9% YoY.

* WPRO delivered USD revenue/INR EBIT/INR PAT growth of 9.2%/-1.0%/- 9.4% YoY in 9MFY23.

* The EBIT margin in IT Services expanded by 120bp QoQ to 16.3%, ahead of our estimate of 15.4%.

* Full-year FY23 revenue growth guidance was 11.5-12% YoY in CC, implying 4Q guidance of -0.6% to +1.0% QoQ CC, below our expectation.

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