TCV numbers provide FY24 revenue visibility; revenue conversion to be key - Wipro Q3 review

What’s Buzzing 

Wipro has guided for 11.5-12% revenue growth in CC for FY23. Total TCV numbers for the quarter were at US$4.3 billion (bn), up 26% YoY. 

Context 

Wipro’s IT services revenues increased 0.6% QoQ in CC while dollar revenues were up 0.2% QoQ to US$2,803.5 million (mn). Rupee revenues were up 3.1% QoQ to Rs 23,056 crore (vs. our expectations of 3.6% QoQ). Vertical wise, in CC terms, growth was aided by Healthcare & Energy (23% mix together), which grew 5.5% and 2% QoQ, respectively, while BFSI, Communication & Technology vertical reported a decline of 5.9%, 0.6% and 2.4%, respectively. Geography wise in CC terms, sequential growth was aided by Europe, which reported 2.4% growth while America and RoW reported weak numbers. IT services margins were up 120 bps QoQ on operating efficiencies and shift of some resources from FPP to T&M while it was aided by accounting treatment to one-time restructuring costs. Attrition was down 180 bps QoQ 21.2% (down 260 bps from peak in Q4FY22). The company for the first time reported total TCV number for the quarter, which was at US$4.3 bn, up 26% YoY in CC, while large deal order book was at US$1 bn for Q3, up 69% YoY. The company is guiding for revenue growth for IT services to be in the range of 11.5-12% in CC terms for FY23. 

Our Perspective 

Q3 revenues came in the guided range albeit on the lower end but margin expansion was a positive surprise. Total TCV number looks strong to us. Even if it stays at this level for FY24, we are looking at US$13 bn revenue opportunity in FY25, assuming conservative book to bill of 0.75x. However, order book to revenue conversion is the key, which is yet to play out meaningfully in Wipro’s case due to execution delay from the client side. The company has to adopt it to their comfort. The management is confident of revenue conversion to play out in FY24, FY25. Vendor consolidation is another area where the company is likely to be one of the beneficiaries, in our view. Wipro also mentioned that 16.3% is the new base for margins. Margins are likely to expand, going forward, on easing of supply side pressure and lower subcontracting costs. The company also indicated that it aspires to be in the high teen margin trajectory in the medium to long term, which, along with strong growth, could lead to a re-rating of the stock, in our opinion. We estimate 8.8%, 6.3%, 6.6% revenue, EBITDA, PAT CAGR, respectively, in FY22-25E.