Friday, April 28, 2023

Wipro Ltd Records Stable Operating Performance; Weak Guidance


CMP: Rs374  

Target Price: Rs470

Wipro reported stable operating performance in Q4. Revenue was marginally below our estimate, while margins were broadly in-line. Management remains cautious about growth prospects, citing slowdown in select sectors (BFSI, Technology) and weakness in discretionary spend. Wipro has signed 15 large deals worth USD1.1bn TCV in Q4 and total deal intake was USD4.1bn (book-to-bill at ~1.5x). Management highlighted that the deal pipeline remains robust and the pipeline is more skewed towards cost takeout and vendor consolidation deals. The company is not witnessing any material project cancellations, although it has seen some ramp downs due to lower discretionary spends. Among verticals, BFSI and Technology are witnessing softness, with Retail and CPG also affected. Oil & Gas and Healthcare continue to be resilient. The cautious approach by clients due to macro uncertainties is leading to softness in near-term spending which is reflected in the weak Q1FY24 guidance. Wipro has guided for sequential revenue decline of 1% to 3% (in CC terms) in IT Services (including India SRE) for Q1FY24. It announced a buyback of Rs120bn at Rs445 per share (~5% of equity). Despite the strong deal intake over the last few quarters, Q1 revenue growth guidance missed expectations, and divergence between deal intake and revenue conversion remains puzzling. We cut our EPS estimates for FY24/25 by 1.3%/3.4%, factoring-in the Q4 performance, buyback and weak Q1 guidance. We maintain BUY on the stock, with TP of Rs470/share at 17x Mar-25E EPS (earlier, Rs480).

Result Summary: Wipro reported revenue of USD2.82bn, up 0.7%/3.7% QoQ/YoY (0.6%/6.5% QoQ/YoY in CC terms), a tad below our estimate of USD2.84bn. Financial services, manufacturing, communications, consumer, and technology witnessed sequential decline of 2.4%, 0.3%, 4.4%, 0.9%, and 2.7%, respectively, while ENU and Health grew 5.9% and 2% QoQ in CC terms. Among geographies, Americas 1, Americas 2 and Europe saw a decline of 1.5%, 0.3% and 0.6% QoQ, respectively, while APMEA grew by 0.7% QoQ. IT Services’ EBITM remains flat QoQ at 16.3%, in line with our estimates. PAT grew by a marginal 0.7% QoQ to Rs30.7bn, but fell short of our estimate of Rs31.8bn. Headcount declined for the second consecutive quarter, down by 1,823 to 256,921. Attrition also declined, for a fourth straight quarter, with LTM attrition at 19.2% in Q4. What we liked: In-line operating performance, attrition moderating to 19.2%, healthy deal intake. What we did not like: Weak guidance for Q1FY24.

Earnings-call KTAs: 1) Company is not facing any client-specific issues, projects cancellation, or delivery issues, etc. Softness is largely due to delay in decision making amid macro uncertainties and weak discretionary spending. 2) The macro environment remains uncertain and some recent events led to greater cautiousness. Management is watchful of how the situation pans out and believes that growth will come back once clarity emerges. 3) Company is not seeing a radical change in the deal closure cycle. Slowdown in discretionary spending in BFSI and Technology is evident. Pockets of consulting business like security, SAP, etc are faring well. The consulting business is cyclical and the first to get impacted during a slowdown, but also the first to improve. 4) Expects EBITM to remain near the current levels in the short term and recovery should trend towards ~17% with growth. 5) Wage hike would be similar to last year’s and is likely in Q2FY24. Variable pay would be ~80% on an overall basis. 6) Voluntary attrition decreased by 330bps QoQ to 14.1% on a quarterly annualized basis. 7) Net cash at the end of Q4 was USD3.1bn. With Q1 cash generation, it may remain above USD1.5bn post the buyback. 8) Wipro on-boarded over 22,000 freshers in FY23.

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