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Simplification of the operating model

* WPRO appointed Mr. Thierry Delaporte as CEO in FY21 on completion of Mr. Abidali Neemuchwala’s five-year term. With the change in CEO, it also embarked on further simplification of the organization structure.

* The company has reorganized the IT Services segment from seven industry verticals to four SMUs – Americas 1, Americas 2, Europe, and APMEA. Americas 1 and 2 are primarily organized by industry sector, while Europe and APMEA are organized by countries.

* WPRO is undertaking a drastic restructuring of its business, reducing layers, and splitting the business by region. It expects this to result in a much more agile and nimble organization, which will accelerate growth.

Enhanced focus on ‘key account managers’

* WPRO has increased its focus on key account managers, which are the go to entities for clients. All other teams, including technology specialist and delivery leaders, will enable the key account managers.

* Reducing the layers between account managers and tech team will help in structuring WPRO as a sales oriented organization.

* Better understanding of clients’ requirements will help the company to channel its efforts and investments towards more relevant market opportunities. This will be key to a better portfolio and in turn drive growth for the company.

M&A to be a key tool for growth

* WPRO is focusing on M&A as a key area to fast-track solutions and capability building in emerging areas and is accelerating access and presence in identified markets.

* During FY21, it closed its biggest ever acquisition of CAPCO for USD1.45b. Capco will enhance its consulting practice in the BFSI domain. It has an annual revenue run-rate of USD700m and employs ~5,000 consultants.

* The company will keep an eye open for acquisitions, and is continuously working towards driving synergies and better integration in acquired entities.

Large focus on talent development

* The company believes that with a rapid shift to Digital, the demand for talent will outpace supply and become a key dependency for growth.

* WPRO has built an ambitious program to scale talent across the front-end, domain, and technology areas. Apart from hiring, there has been an increased focus towards reskilling and building on-site and local scale in Digital and next-generation capabilities.

* It has also simplified its delivery structure as part of the broader strategy laid out by the CEO. This will help in attracting and retaining better talent.

* We believe retaining and attracting talent will be a difficult ask for the entire industry in near to medium term. Increased cost of lateral talent and the second wage hike announced by the company will lead to higher employee expenses. We expect ~200bp moderation in margin over FY21-23E on account of the Capco acquisition, increased employee cost, and sales investments.

Strong Balance Sheet; robust cash conversion

* WPRO’s Balance Sheet remained strong and liquid despite it stepping up capital return (dividend + buy back) to shareholders.

* Cash and short-term investments continue to account for an impressive 42% of total assets and 12% of market capitalization.

* OCF/FCF grew ~47%/~66% in FY21. OCF/EBITDA conversion stood ~98%, while FCF/PAT conversion stood at 119%.

* WPRO announced a buyback of INR9.5b in FY21. The buyback, along with dividend payout, amounted to ~93% of adjusted PAT.

Valuation and view

* 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/the Middle East) have further constrained growth. We expect the refreshed strategy of the new management to make the organization leaner. Its growth-focused approach would aid growth over the medium-to-long term.

* However, the current restructuring and investments would take a toll on near term margin, eating away at the gains from operational efficiency. This should keep margin rangebound.

* 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 21x FY23E EPS.

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