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Focus on driving growth with stable margin

* We attended WPRO’s Investor Day. The management commentary continues to point towards sustained growth momentum, with stable margin.

* The management indicated a strong and broad based demand environment. All industry verticals are witnessing good demand. Within geographies, its earlier growth driver – the US – continues to grow, while Europe (particularly continental Europe) has witnessed strong acceleration.

* WPRO aspires to be the orchestrator of choice for customers on Cloud deals, allowing it to partner both with clients and Hyperscalers. It reiterated its plan to invest USD1b in building its Fullstride Cloud service and plans to continue to invest in other high growth areas.

* Investment in the sales channels via: 1) lateral leadership hires (80% in market facing roles), 2) a large deals team, and 3) strategic partnerships, are expected to power growth.

* The acquisition of Capco has proved to be successful, with 22 joint go to market deal wins for WPRO. It has been able to open large opportunities with clients, where it was unable to fulfill the requirements earlier, and has seen an increase in wallet share at large BFSI clients.

* WPRO has been active in the M&A market, with six investments over the past one year, including Capco – its largest ever acquisition. The management indicated continued appetite for inorganic investments, and said it will also not shy away from large acquisitions if they make business sense.

* Its focus is to drive strong growth, with a large investment pipeline in both capability and sales. Margin benefits from offshore, fixed price productivity, pricing, utilization, and pyramid are expected to be re-invested in the business. The management indicated a stable margin outlook.

* WPRO expects the supply environment to stay tight, and hence has reoriented its appraisal system to incentivize high performers, along with a large fresher intake (25k in FY23). While it expects employees to return to work, it will operate in a hybrid environment, with greater flexibility. It said its crowdsourcing platform Topcoder will add dynamic workforce capabilities.

Capco – smooth integration, powering growth

* The management commentary was upbeat on Capco. It indicated a smooth integration, strong success in joint deal wins, and robust future outlook, with a combined GTM and strong pipeline.

* Combination of WPRO and Capco provides both consulting and domain technology capabilities. Demand for the combined services of both companies is strong. Combined deal wins have been robust. Capco has won 120 deals in the first six months since the transaction’s closure. This includes a few large transformation deals that were possible because of the combined capabilities of WPRO and Capco.

* While there are differences in both company cultures. Post integration, the Capco team has discovered more similarities than differences. We see this as a positive sign of cultural integration.

* WPRO will integrate Capco's capability for its largest FS clients. Capco will spearhead front-end GTM for WPRO for large FS clients. We see this as a strategic step, which will enable growth in BFSI.

Focus on large deals to drive traction in sales

* Demand continues to remain strong, with the pipeline being the highest in the recent past. Deal TCV was up 80% in the past four quarters. The company has signed mega deals in both Americas and Europe geography, with a potential for both to reach a TCV of USD1b.

* The management is focusing on sourcing large deals from the market. It is accelerating its focus on larger deals and expanding its market share in over USD200m and USD300m accounts.

* It has built a large deal team. Strong hiring in market facing roles will enable good sales traction. The management expects WPRO's participation and win rate in large programs to accelerate.

Strategic partnerships

* WPRO is investing in its hyperscaler partnerships to drive leading solutions. Investments are in the area of Cloud-led modernization, AI, ML, industry-specific solutions, etc.

* It has hired senior leaders and each partnership is led by senior leaders.

* Key hyperscaler alliances include AWS, Azure, Google, Salesforce, SAP, and Service Now.

* Partners are also co-innovating and co-investing with WPRO.

* Order book in ACV terms is up 80% YoY across the top six partnerships.

Appetite for inorganic investments

* The management sees M&A as a strategic pillar of the growth story.

* Its recent M&As have been to boost its local presence, enhance its global delivery capabilities, and improve its strategic positioning within clients.

* The company is investing in both change management and integration teams to enable smoother integration of inorganic investments.

* WPRO has undertaken six acquisitions in the past year, and will continue to invest in inorganic growth. The management has also indicated appetite for large acquisitions, if it makes business relevance.

Stable margin trajectory

* The management indicated a strong investment pipeline led by capabilities (Cloud and Digital) and sales (large deals and partner ecosystem).

* Margin gains from growth and productivity improvement will be re-invested in the business, given the demand rich environment.

* Utilization, offshore, employee productivity, higher pricing, and pyramid rationalization are some of the operational levers that the management is working to enhance.

* The management said it will sustain margin at current levels. Its focus is on driving stronger growth.

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

* We maintain our Neutral stance as a successful turnaround from its growth is aptly priced into our estimates and valuation. Our TP implies 28x FY23E EPS.

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