Wipro’s (WPRO) 4QFY22 IT services revenue grew by 3.1% QoQ/28.5% YoY CC to US$2.7bn, in line with our estimate of US$2.7bn. Sequential growth came at 3.1% in CC terms, vs. our estimate of 3%. EBIT margin of IT services business is at 17%, broadly in line with our estimate of 17.1%, due to high attrition rate. Net income stood at Rs30.9bn (up 4% QoQ/up 4% YoY), 2.6% higher than our expectation of Rs30.1bn. 9 Large deal TCV signed with a combined TCV of over US$400mn in 4QFY22. In ACV terms, the order book grew by 30% YoY in FY22. The company remained optimistic on the demand environment, which was encouraging. Management guided for 1QFY23 revenue from IT Services business to be at US$2.75-2.80bn. This translates into a sequential growth of 1-3%. We expect the restructuring efforts, which include a simplified operating structuring, step-up in capability upgrade and talent management to bode well for WPRO in the medium term. However, margin pressure would continue. We lower FY23E-FY24E EPS estimates by 6% each, factoring weak margin profile. We retain our BUY recommendation and revise the target price to Rs570 (vs. the prior Rs720) and value the stock at 21x (earlier 25x) FY24E earnings.
Attrition to Stabilise in Coming Quarters
1) Among verticals, growth was led by Manufacturing (7.4% QoQ CC), Consumer (4.2% QoQ CC), Technology (3.6% YoY CC) and BFSI (3.4% QoQ CC). 2) Among geographies, growth was particularly strong in Americas 2 (5.1% QoQ CC) and Americas 1 (3.1% QoQ CC). 3) Voluntary TTM attrition in IT services stood at 23.8%, compared to 22.7% in 3QFY22. 4) In FY22, the company added a net work force of 45,416 employees and hired ~19,000 freshers. It plans to double its freshers hiring next year. 5) US$100mn+ client bucket and US$50mn+ client bucket grew to 19 and 50 respectively in 4QFY22. Though attrition remains elevated at present, we expect it to stabilize in 1HFY23 and would taper down in 2HFY23E.
Supply Side Challenges and Higher Investments to Suppress Margins
EBIT margin of IT services business came in at 17%, slightly lower than our estimate of 17.1%, due to supply side issues, lower operating leverage and higher-than-expected integration cost of recent acquisitions. WPRO aims to achieve 17-17.5% margin in the medium term but expects margins to remain low for the next 2-3 quarters due to supply-side challenges and higher investments. We expect a limited margin upside for FY23 due to the higher SG&A cost (higher attrition and resumption of offices), rising attrition levels, high investments and accelerated hiring over the next two quarters. We estimate an EBIT margin of 16.7-17.1% over FY23E-FY24E.
Lower Margin Profile and Growth Moderation; Lower Valuation Multiple
At CMP, WPRO trades at 18.7x FY24E EPS, which is at 26%/17% discount to the larger peers (TCS/Infosys). Restructuring efforts, which include a simplified operating structuring, step-up in capability upgrade and talent management bode well for WPRO in the medium term. While the company lagged on the revenue growth front vs. larger Indian peers historically, we expect WPRO’s revenue to clock 12% (including acquisitions) CAGR over FY22-FY24E vs. 4% CAGR over FY18-FY21, driven by the recent large deal wins and focused efforts on prioritized sectors/geographies. In line with our downward revision to valuation multiple of IT sector amid reducing revenue growth pace and mounting margin pressure, we reduce valuation multiple from 25x to 21x. In view of strong deal wins and healthy earning CAGR, we retain our BUY recommendation with target price of Rs570 (from earlier Rs720), valuing the stock at 21x (from earlier 25x) FY24E earnings.
Shares of Wipro Limited was last trading in BSE at Rs. 495.05 as compared to the previous close of Rs. 509.00. The total number of shares traded during the day was 1371314 in over 68844 trades.
The stock hit an intraday high of Rs. 519.00 and intraday low of 492.75. The net turnover during the day was Rs. 682713884.00. |
