Monday, January 16, 2023

Wipro Ltd; Beat On Margins; Q3 Revenue Growth And Q4 Guidance Missed Expectations


CMP: Rs394  

Target Price: Rs470

Wipro posted mixed operating performance in Q3. Margins came in above estimates, while Q3 revenue and Q4 growth guidance missed our expectations. Revenue growth in Q3 was impacted by furloughs, softness in discretionary spending, and delay in deal ramp-ups and revenue conversion because of macro uncertainties. Management highlighted pockets of weakness in retail, particularly in America, and technology verticals. Management remains cautiously optimistic about growth prospects and is closely monitoring the possible impact of macro uncertainties on demand and revenue conversion. Wipro reported a strong overall deal win TCV of USD4.3bn (up 26% YoY; includes 11 large deals with combined TCV of >USD1bn) translating into a book-to-bill ratio of ~1.5x. Wipro has guided -0.6% to 1% QoQ CC revenue growth in IT services for Q4, below our estimates, factoring in softness in discretionary spending and slower revenue conversion due to prevailing macro uncertainties. IT services’ EBITM grew 120bps to 16.3% in Q3, 80bps above our expectations, and is likely to serve as a base for margins and gradual improvement. We cut our earnings by <1% for FY23E-25E post Q3 performance. We maintain BUY with a TP of Rs470 at 17x Dec-24E EPS.

Result Summary: Wipro’s revenue grew by 0.2% QoQ to USD2.8bn (CC 0.6% QoQ/10.4% YoY), a tad below our expectations of 1% CC. IT services’ EBITM expanded by 120bps QoQ to 16.3%, 80 bps above our estimates, on account of strong operational improvements and automation-led efficiencies, which negated the impact of salary increases, quarterly promotions, and long-term incentives for senior leadership. Adjusted profit stood at Rs30.5bn. Revenue growth was led by healthcare (4.7% QoQ CC), ENU (2.8%), and manufacturing (0.2%) verticals, while BFSI, technology, and communication reported a decline in CC terms. Management has guided for -0.6% to 1% QoQ CC revenue growth in IT services for Q4, driving 11.5-12% CC revenue growth for FY23. What we liked: Margin beat, robust deal intake, healthy cash conversion (OCF/EBITDA at ~93% in Q3), and moderating attrition (quarterly annualized attrition moderated 360bps QoQ to 17.5%). What we did not like: Revenue miss in Q3 and weaker-than-expected Q4 revenue growth guidance.

Earnings call KTAs: 1) Wipro signed an overall deal TCV of over USD4.3bn in Q3, driven by – a) full stride cloud and engineering services, which grew by 25% and 45%, respectively, b) vendor consolidation opportunities and market share gain, and c) strong traction in hyperscaler partnership (driving ~USD2bn deal booking, ~44% of overall TCV). 2) iDEAS grew 12% YoY, led by Cloud (27%), Apps and Data (18%), Digital Experience (16%), and Engineering (12%). iCORE grew 8% YoY, led by Cybersecurity (16%) and Digital Operation and Platform (9%). 3) CIS order booking grew 50% YoY. Shift to cloud weighed on revenue growth in CIS. 4) EBITM improvement in Q3 was driven by better supply management with increased fresher intake, lower backfilling costs with moderation in attrition, and better execution in FPP. 5) The top-5 clients grew 15.7% YoY CC and the top-10 clients grew 14.7%, underscoring deepening relationships with top strategic clients. 6) Voluntary TTM attrition moderated 180bps QoQ to 21.2%. Quarterly annualized attrition moderated 360bps QoQ to 17.5%. Management expects attrition to moderate further in the coming quarters. 7) It added ~3,000 freshers in Q3 (~17,000 in 9M) and plans to add 5,000 freshers in Q4. 8) Headcount declined sequentially in Q3 with net reduction of 435 employees as the company focuses on driving utilization. 9) Net cash was USD2.7bn at the end of Q3 (gross cash $4.6bn).

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