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Mixed quarter with good delivery but muted guidance

Positive commentary on Consulting is encouraging

* WPRO reported IT Services revenue of USD2.66b in 3QFY24, down 1.7% QoQ CC, near the upper end of its guidance and 100bp ahead of our estimate. It reported an order intake of USD3.8b (flat QoQ), with large deal TCV of USD0.9b (down 8.3% QoQ). Despite four straight quarters of revenue decline, WPRO has provided muted guidance for 4Q, with USD CC revenue performance to be in the range of -1.5% to +0.5% QoQ.

* Despite revenue growth in 3Q, WPRO maintained its IT Services EBIT margin at 16.0% (flat QoQ), ahead of our expectation of 15.1% due to better cost control and lower employee count.

* We see WPRO’s 3Q performance as positive given that the company struggled to deliver on expectation over the last few quarters due to macro headwinds. Moreover, the management commentary on higher deal wins in the Consulting vertical indicates that the drag from that segment is now bottoming out, which should help improve overall growth.

*But we believe that WPRO’s weak 4QFY24 revenue growth guidance is a concern, along with unchanged commentary on demand and discretionary spending. While we expect WPRO to return to growth in FY25 after posting a decline in FY24, the weak base should result in revenue growth lower than that of peers. We expect the company to deliver a 3.9% CAGR in IT Services revenue over FY23-26.

* EBIT margin stood at 16.0% (IT service), beating our estimate by 100bp QoQ, despite two months of wage hikes. The management remains confident of reverting to its 17% EBIT margin guidance in the medium term. We expect WPRO to revert to this level of profitability in FY25, which should translate to an 8.0% CAGR in INR PAT over FY23-26E.

*We have kept our FY24-FY26 EPS estimates broadly unchanged after its 3Q print. We maintain our Neutral stance as we view the current valuation as fair. Our TP of INR520 is based on 19x FY26E EPS.

Steady performance beat our estimates, weak 4Q guidance

* IT services USD rev stood at USD2.66b, down 1.7% QoQ in CC (reported USD down 2.1% QoQ) and better than our estimate of a 2.7% QoQ CC decline.

* BFS (-4.3% QoQ CC), Mfg (-6.1% QoQ CC), Comms (-8.6% QoQ CC) and Technology (-1.9% QoQ CC) were adversely impacted.

* IT Services EBIT margin was stable at 16.0% (down 10bp QoQ) despite wage hike in 3Q, above our estimate of a 100bp QoQ decline.

* 3Q deal TCV came in at USD3.8b, flat QoQ and down 13.5% YoY CC. Large deal TCV of USD0.9b (down 8.3% QoQ).

* Net profit stood at INR27b, down 11.7% YoY but above our estimate of INR25b due to a beat in margins.

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