WNS - Profit stabilization alleviates concern, but growth still muted; Sell - Goldman Sachs

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COMPANY UPDATE
WNS (Holdings) Ltd. (WNS)
Sell
Profit stabilization alleviates concern, but growth still muted; Sell
What's changed
We are adjusting our estimates following reported 2Q results. For FY11, we
raise our adjusted EPS (excluding stock comp and amortization) by 5% to
$0.97 on higher margin assumptions. For FY12/FY13, our adjusted EPS go to
$1.05/$1.16 ($1.02/$1.10 prior) reflecting higher margin assumptions. Our
FY11/FY12/FY13 GAAP EPS now stand at $0.17/$0.22/$0.35 ($0.03/$0.13/$0.22
prior), with the larger GAAP revisions driven by lower stock comp expense, as
the company implements its move towards a more variable, cash-based
compensation structure. Our revenue forecast remains largely unchanged for
all periods. Reflecting our revised estimates, we raise our 12-month price
target to $10 ($9 prior), suggesting 6% downside.
Implications
Profit stabilization driven by a positive turn in revenue growth (+2%
organic qoq) and sequential margin recovery (+420 bp ex. FX) provide
some comfort that WNS’ earnings profile has stabilized, following three
consecutive quarters of qoq decline in revenue and operating profit.
However, we maintain our Sell rating and expect continued share
underperformance given: (1) despite 2Q earnings upside, a largely
unchanged outlook implies that profit growth will remain muted on a yoy
basis and trail its comparable group through the rest of this year; (2) we
believe recent investments to reinvigorating the salesforce, while positive
for long-term revenue prospects, will slow the pace of margin recovery in
the near term; (3) operating metrics including headcount growth (flat qoq)
and attrition (42%) remain weak and continue to lag industry peers.
Valuation
Our 12-month price target of $10 is based on a weighted average model
that incorporates a sector-relative Investment Framework, CY11 P/E, CY11
EV/EBITDA, and an M&A value; it implies a CY11 P/E of 9.3X adjusted EPS.
Key risks
Higher volume growth, pricing, and/or operating leverage and M&A.