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Miss on 3Q and 4Q revenue guidance

Demand outlook remains intact, but valuation full

* Wipro (WPRO) reported 3QFY22 IT Services revenue of USD2.64b (+3.0% QoQ CC), missing our estimate by 70bps. The performance of verticals in 3Q was mixed, with strong QoQ growth in BFS and Consumer, while ENU and Tech were weak.

* The 3Q IT Services EBIT margin was down 20bps QoQ to 17.6%, in line with our estimate. Wipro has been able to sustain the EBIT margin ahead of its guided range of 17.0–17.5% despite the wage impact during the quarter. It reported TCV of USD600m in 3Q, moderately higher v/s the 2Q deal TCV.

* While we are not concerned about the miss in 3Q given the high base of 2Q as well as the seasonal impact, the 4Q revenue growth guidance of 2–4% QoQ also missed our estimate (coming in at 3.9% QoQ). Given the strong performance by Wipro over the last few quarters, along with positive demand commentary from the management, the guidance was underwhelming and would act as a drag on near-term share price performance. In our view, this should be partially compensated by the continued robustness in WPRO’s margins, which are ahead of its guidance of 17–17.5%.

* WPRO’s operational metrics have started improving, with utilization (excl. trainees) of 85.8% (-340bp QoQ) reducing due to continued additions to the workforce (+10.3k QoQ). Moreover, while attrition once again increased 220bps QoQ to 22.7%, the management highlighted that it has peaked ahead of the expectation and should start easing from 4Q.

* We now expect FY22 IT Services revenue growth at 27.4% (18.5% YoY organic growth), down 100bps v/s the previous expectation. With in-line margin performance, we have marginally lowered our EBIT margin estimate, which would result in FY22–24E PAT growth of 11%. 9MFY22 USD Revenue/EBIT/PAT grew 26.9%/15.5%/16.2% YoY

* We lower our FY22–24E EPS estimate by 1% to factor in the miss on the growth front. We maintain our Neutral stance as we view the current valuation as fair. Our TP implies 26x FY24E EPS.

Miss on topline; modest 4Q guidance

* In 3QFY22, CC IT Services revenue grew 3.0% QoQ, INR EBIT grew 5% YoY, and INR PAT was flat YoY.

* IT Services USD revenue of USD2.64b, growth of +3.0% QoQ in CC (reported USD growth of 2.3% QoQ), was below our estimate of 3.7% QoQ. Organic USD CC growth stood at +2.8% QoQ.

* BFS (+4.1% QoQ) and Consumer (+5.2% QoQ) did well, while ENU (-2.2% QoQ) and Tech (0.9% QoQ) were weak.

* The IT Services EBIT margin of 17.6% (-20bps QoQ) was in line with our expectation. Net utilization declined 340bps QoQ, while the offshore revenue share increased 70bps QoQ.

* The 4QFY22 revenue growth guidance of 2–4% was marginally lower than our expectation (estimated: +4% QoQ in 4Q).

* Attrition (LTM) was up 220bps QoQ to 22.7%, net employee adds stood at 10.3k, and net utilization was up 40bp.

* The company reported net profit of INR 29.7b, flat YoY and in line with our estimates.

* WPRO had a large deal TCV of over USD600m.

* OCF for 3QFY22 stood at INR30b, implying OCF/PAT of 87%; FCF stood at INR24.4b, implying FCF/PAT of 82%.

* For 4QFY22, the management guided for CC revenue growth between 2% and 4% sequentially.

Key highlights from management commentary

* The company is confident about growth given the demand environment, strong pipeline, and order book.

* The pipeline has a healthy mix of small, medium, and large deals; the company is seeing expansion in mid-sized deals.

* The order book is up 27% YoY (47% YoY in ACV terms), with ~50% in the USD10– 30m range, and the win rate has improved dramatically by 300bps.

* The company is winning in the Digital business. The Cloud business grew 30% YoY. The company forged good cloud partnerships, while order wins with partners grew the highest ever at 40% YoY. The management further indicated that there is massive cloud opportunity for the next five years at least.

* The Germany business almost doubled YoY and the UK business registered 40% YoY growth. The management is confident about the Europe business.

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 new management’s refreshed strategy to make the organization leaner. Its growth-focused and client-centric approach would aid growth over the medium-to-long term.

* We marginally lower our FY22–24E EPS by 1%. We maintain our Neutral stance 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 26x FY24E EPS.

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