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Weak growth and margin guidance to cap upside

Consulting acquisitions adversely impact capital allocation

Wipro (WPRO) reported 4QFY22 IT Services revenue of USD2.72b (+3.1% QoQ) in constant currency (CC), missing our estimate of +3.5% QoQ CC. Manufacturing and consumer verticals did well while communication declined. 4QFY22 EBIT margin of IT Services contracted 60bp QoQ to 17%, 50bp below our estimate. WPRO guided for 1QFY23 revenue growth of 1-3% QoQ and FY23 EBIT margin to be below its medium-term guidance band of 17.0-17.5% due to elevated investments.

We see the muted topline growth guidance for 1QFY23 as disappointing, since the expectation was that WPRO’s 1Q seasonality is a thing of past and it should gain from the strong demand for consulting-led IT services.

Moreover, while the company’s commentary on demand environment remains robust, there is a visible absence of any large deal over the past few quarters. We expect WPRO to report FY23 organic CC USD revenue growth towards the lower end of our Tier 1 IT services universe (MOSLe of 12.4%).

Moreover, the management plans for elevated investments in FY23E will result in IT services’ EBIT margin dipping below the lower end of guidance (MOSLe of 16.8%). This should further compress the earnings growth next year. Our estimates suggest FY23 INR PAT growth of 7.0%, one of the lowest in our IT services coverage.

Finally, WPRO has given muted payout in FY22 (27% v/s 93% in FY21) due to elevated investments (USD1.45b in Capco and USD540mn in Rizing). We project this to continue in FY23 as well, and again miss investor expectations.

We lower our FY23E/24E EPS by 1.3%/1.6% to factor in the miss on the growth guidance and lower margin. We maintain our Neutral rating as we view the current valuation as fair. Our TP implies 20x FY24E EPS.

4QFY22 below expectation, 1QFY23 guidance weak

In 4QFY22, IT Services revenue in CC grew 3.1% QoQ, INR EBIT rose 2.7% YoY, and INR PAT was up 4% YoY.

USD revenue/ INR EBIT/ INR PAT grew 26%/12%/13% in FY22, respectively.

IT services revenue of USD2.7b, +3.1% QoQ in CC was below our CC growth expectation of +3.5% QoQ.

Manufacturing (+7.4% QoQ CC) and Consumer (+4.2% QoQ CC) did well while Communications (-1.2% QoQ CC) and health (0.3% QoQ CC) were weak.

The IT Services EBIT margin of 17.0% (-60bp QoQ), missed our expectation by 50bp.

Net utilization contracted 60bp QoQ but offshore revenue share rose 200bp QoQ

1QFY23 revenue growth guidance of 1-3% was below our expectation of +3.6% QoQ.

WPRO expects double-digit growth in FY23 and plans to maintain 17.0-17.5% EBIT margin. The 1Q-3QFY23 EBIT margins will be adversely impacted by investments.

Attrition (LTM) was up 110bp QoQ to 23.8%; net employee adds were ~11.5k.

Net profit of INR30.9b rose 4% YoY and was in line with our estimates.

WPRO had a large deal TCV of over USD2.3b in FY22.

OCF for 4QFY22 stood at INR23.3b, implying OCF/PAT of 75.5%.

Key highlights from the management commentary

The management continues to see good momentum with CapCo. Over the last year, WPRO has been able to close 60 strategic deals with CapCo and it remains positive on the business with very strong order book and strongest ever bookings.

Rizing is an important acquisition for Wipro as it: a) is complimentary to the business and provides opportunity to cross-sell and up-sell, b) provides good industry exposures in utilities, retail and fashion, c) has local presence in the US, Canada, Australia and Germany and d) would help WPRO in gaining capabilities and also gain from WPRO’s capabilities.

EBIT margin was in the stated range of 17.0-17.5% and the management retained its margin guidance. The management also stated that there would be margin pressure for the next few quarters.

Valuations factor in muted growth; retain Neutral

WPRO’s recent performance and deal momentum have seen a meaningful moderation, which should result in its FY23E organic growth to be one of the lowest among Tier-1 IT services companies. Further, its margins are likely to be below the medium-term guided range of 17-17.5%. Moreover, its capital allocation has started suffering due to elevated investments in Consulting capabilities and should impact FY23E payout as well.

We lower our FY23E/24E EPS by 1.3%/1.6%. We maintain our Neutral rating as we await: a) further evidence of the execution of WPRO’s refreshed strategy, and b) a successful turnaround from its growth struggles over the last decade, before turning more constructive on the stock. Our TP implies 20x FY24E EPS.

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