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In line 4QFY21 and revenue guidance, but see a drag on margin in FY22E

Remain Neutral on the stock on fair valuations

* Wipro (WPRO) reported an in line 4QFY21 revenue growth of 3% QoQ in CC terms in IT Services, near the higher end of its guidance band (1.5-3.5%). EBIT margin dipped 70bp to 21% due to a partial wage hike, but was ahead of our expectation of 20.4% on better cost control.

* It reported 12 large deals (over USD30m) and a TCV of USD1.4b in 4QFY21, including one large deal of over USD0.5bn in Americas (expandable to USD1bn). Order book in 2HFY21 was up 33% YoY to USD7.1b, with a large deal TCV of USD2.6b.

* Despite a very strong order book and ramp up in two mega deals (we estimate ~200bp QoQ impact), its 1QFY22 revenue growth guidance was unexciting at 2-4% QoQ CC. Excluding the mega deals, this implies no growth at the lower end, which is weak even after adjusting for seasonality. This, in our view, is exacerbated due to WPRO’s continued struggle with account mining, despite impressive performance in bagging accounts.

* We have factored in Capco and Ampion acquisitions in our 2Q estimates, and now expect FY22 IT Services’ revenue growth at 21.6% (13% YoY organic growth). This growth lags behind its larger peers – TCS and INFO (we estimate FY22E USD revenue growth at 16.7% and 16.3%, respectively), despite a more favorable FY21 base.

* WPRO should see multiple margin headwinds: 1) large deal ramp ups, 2) a wage hike, 3) investments, and 4) Capco integration. While cost synergies and continuous cost optimization should partially cushion this impact, it should result in a 220bp YoY reduction in EBIT margin in FY22E (-340bp v/s 4QFY21). This should in turn lead to a 3.6% PAT growth (6.5% EPS growth on a lower share count) in FY22E, the weakest in our largecap coverage.

* We view the management’s growth strategy, continued investment in talent, and a simplified operational model to help improve the focus on customers as a step in the right direction. With WPRO’s growth lagging its peers, we stay on the sidelines and await the impact of its new strategy on organic growth.

* Cash conversion remained low in 4QFY21 (38% FCF/PAT ratio), led by cash reduction from the early payment of Apr’21 salaries. However, the company delivered a robust FCF/PAT ratio of 119% in FY21, implying a 64% growth in FCF. In FY21, reported revenue (USD)/EBIT/PAT in IT Services moved by 1.4%/13.6%/11%.

* We downgrade our FY22E EPS estimate by 6% due to margin headwinds from the Capco acquisition, partially compensated by the lower share count. Our FY23 estimate largely remains unchanged. We maintain our Neutral stance as we view current valuation as fair. Our TP implies 19x FY23E EPS.

Revenue in line

* 4QFY21 USD revenue from IT Services increased 3.9% YoY (in line), EBIT rose 24% (v/s our estimate of 18.8%), and PAT grew 28% (v/s our expectation of 19.4%). For FY21, USD revenue declined 1.4% YoY, EBIT increased 13.6%, and PAT grew 11%.

* IT Services’ revenue increased 3% QoQ CC to USD2,152m, in line with our estimate and on the higher side of the management’s guidance of 1.5-3.5% growth, led by strong volume growth.

* EBIT margin in IT Services dipped 70bp QoQ to 21% on account of a wage hike (the company hiked wages for 80% of its employees) and was 60bp above our estimate of 20.4%. WPRO will complete the wage hike cycle of senior employees in 1QFY22.

* PAT grew 28% YoY to INR30b, a 7% beat led by higher operating income and lower ETR (20.7% v/s our expectation of 22.5%). Sequential growth was mainly led by Technology (+9.9% QoQ CC), Consumer (+ 6.9% QoQ CC), BFSI (+2.7% QoQ CC), and E&U (2.7% QoQ CC). Communication (-0.4% QoQ CC), Manufacturing (-1.1% QoQ CC), and Health (-2.9% QoQ CC) saw a decline.

* Growth was broad based across the US and Europe, which grew in line with WPRO’s growth rate. APMEA saw a 1.6% sequential decline in 4QFY21.

* Net utilization remained flat, while attrition increased 100bp sequentially.

* Net addition of 7.7K employees includes onboarding of over 2,850 freshers in 4QFY21.

* WPRO closed 12 deals with a TCV of over USD30m. TCV booked on these deals were over USD1.4b.

* OCF for 4QFY21 stood at INR17.3b, a growth of 22.8% YoY, implying an OCF/PAT ratio of 58.2%. FCF grew 30.4% YoY to INR11.3b, implying a FCF/PAT ratio of 38.1%.

* OCF for FY21 stood at INR147.6b, a growth of 46.6% YoY, implying an OCF/PAT ratio of 136.7%. FCF grew 64.2% YoY to INR128.7b, implying a FCF/PAT ratio of 119%.

* The management did not declare any dividend for 4QFY21. Payout for FY21 stood at 93% v/s 114% in FY20.

* For 1QFY22, it guided at sequential CC revenue growth between 2% and 4%, excluding acquisitions.

Key highlights from the management commentary

* TCV for 2HFY21 totaled USD7.1b (+33% YoY), which includes 12 large deals with a TCV of USD1.4b. The company closed one deal in Americas that can result in a revenue of USD1b over the course of the deal.

* The management is seeing strong opportunities in new accounts and existing accounts have picked up as well. The company is having a lot more CXO engagements and is building a strong team to take this to the next level.

* It intends to make investments on talent and solutions going forward. EBIT margin in the 19-19.2% range is sustainable for the company. Apart from this, the Capco acquisition would be margin dilutive by 200bp.

* Ampion and Capco would be consolidated into WPRO before the end of Jun’21. The principal component of the Metro AG deal has started to ramp up from 1st Apr’21.

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/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 gains from operational efficiency. This should keep margin rangebound.

* We lower our FY22E EPS by 6%, largely based on upcoming margin headwinds and EPS impact from the Capco acquisition. Our estimate for FY23E largely remains unchanged. 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 19x FY23E EPS.

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