WNS - WNS Holdings: Eyes On Beat-And-Raise Quarter And Potential Catalysts

2024-01-21 03:09:53 ET

Summary

• WNS' beat-and-raise quarter for Q3 FY 2024 sends a strong signal suggesting that the company's full-year FY 2024 and FY 2025 results are likely to be good.
• The ADS-to-ordinary share conversion and potential value-accretive M&A transactions might be the re-rating catalysts for WNS.
• I award a Buy rating to WNS, taking into account its positive financial outlook, attractive valuations, and potential catalysts.

Elevator Pitch

I rate WNS (Holdings) Limited ( WNS ) stock as a Buy. WNS' beat-and-raise quarter offers positive read-throughs for the company's future financial performance, while there are potential catalysts such as M&A to re-rate the stock. The market currently values WNS at a discount to its peer and its historical average. These factors are supportive of a Buy rating for WNS.

Company Description

In the company's media releases , WNS refers to itself as a "provider of global Business Process Management (BPM) solutions" such as "customer experience services, finance and accounting, human resources, procurement, and research and analytics."

Some Examples Of How WNS Has Created Value For Its Clients

WNS' Geographic Presence

The company derived 49.2% and 28.7% of its FY 2023 (YE March 31) revenue from its key North America and UK markets, respectively, as indicated in its 20-F filing . Europe (excluding the UK), Australia, South Africa, and Rest of World accounted for the remaining 7.1%, 6.1%, 1.1%, and 7.8% of WNS' revenue, respectively for the most recent fiscal year.

WNS' Revenue Split By Industry

WNS has a pretty diversified revenue mix in terms of industry exposure as per the chart presented above.

Earnings Beat

On January 18, 2024 before the market opened, WNS issued a press release disclosing the company's financial performance for the third quarter of fiscal 2024 (October 1, 2023 to December 31, 2023).

WNS' non-GAAP adjusted earnings per share or EPS rose by +17% YoY and +8% QoQ to $1.18 in Q3 FY 2024. The company's latest quarterly normalized EPS turned out to be +18% higher than the Wall Street analysts' bottom line projection of $1.00 per share.

The company noted at its third quarter earnings call that "demand for our core process management initiatives continues to be healthy, driven by client requirements for process automation, as well as cost reduction."

In other words, challenging economic conditions mean that more companies are motivated to cut expenses with business process management plans, and this is a tailwind for WNS. This explains why WNS has been able to register a positive surprise with its most recent set of results.

Guidance Raise

In tandem with the Q3 results announcement, WNS raised the mid-point of its FY 2024 non-GAAP revenue and normalized EPS guidance by +0.3% and +4.6% to $1,281 million and $4.33, respectively. This suggests that the company expects to grow its top line and bottom line by +10% and +12%, respectively, in the current fiscal year.

Management is also confident about the company's prospects for FY 2025 (April 1, 2024 to March 31, 2025), after raising its full-year financial guidance.

At its Q3 FY 2024 earnings briefing, WNS highlighted that it anticipates "accelerated growth in fiscal 2025" due to its "growing pipeline" and "reducing headwinds." The company mentioned at its most recent quarterly results briefing that there were one-off "headwinds" like "offshore delivery transition of a large Internet account, volume reductions with certain clients" that affected its 9M FY 2024 performance in a negative way.

ADS to Share Exchange And M&As Are Potential Catalysts

WNS is now trading at 14.1 times (source: S&P Capital IQ ) consensus next twelve months' normalized P/E. This represents a discount to its historical five-year mean P/E ratio of 21.6 times and its peer ExlService Holdings' ( EXLS ) forward P/E metric of 20.8 times.

Apart from expectations of an improvement in financial performance for FY 2025 as outlined in the preceding section, the company's ADS (American Depositary Share) to ordinary share exchange plan and potential M&A deals could be potential re-rating catalysts.

In its Q3 FY 2024 earnings release, WNS revealed "plans to terminate its ADS program, exchange outstanding ADSs for its ordinary shares, and apply for the ordinary shares to be listed on the NYSE" by Q2 FY 2025 (July 1, 2024 to September 30, 2024).

The company revealed at its recent quarterly results call that "index funds" in aggregate have a mere 2% stake in WNS, which indicates that there is huge potential to attract more passive investors and diversify its shareholder base when its ADS-to-ordinary shares conversion exercise is concluded.

Separately, WNS has a reasonably strong financial position to support inorganic growth initiatives.

The company had cash and investments amounting to $260.4 million on its balance sheet as of the end of calendar year 2023, and this is equivalent to almost 9% of its current market capitalization.

WNS' actual financial performance for FY 2025 and beyond could exceed the market's expectations if the company executes on value-accretive deals going forward. At the company's Q3 FY 2024 results briefing, WNS noted its observations that "valuations" of potential acquisition targets "have come very much under control over the past two years or so." This implies that the chances of WNS finding suitable acquisition candidates that can be bought at a reasonable price have increased.

Closing Thoughts

I have a bullish view of WNS. The stock is undervalued based on historical and peer comparisons. The company's financial prospects are favorable and there are visible re-rating catalysts.

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