WNS (Holdings): Focus On Full-Year Outlook And Capital Allocation Moves

seekingalpha10-19

I rate WNS (Holdings) stock as a Hold after analyzing the company's outlook and capital allocation.WNS' recent financial disclosures were disappointing with a "low-quality" bottom line beat and a ...

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Andranik Hakobyan/iStock via Getty Images I award a Hold investment rating to WNS (Holdings) Limited (NYSE:WNS) stock. On the negative side of things, WNS' outlook for the near term is unfavorable, taking into account the full-year guidance cut and the \"low-quality\" bottom-line beat for the latest quarter. On the positive side of things, WNS' current valuations have factored in the company's negative short-term financial prospects, and there are potential value-accretive capital allocation moves that the company can make. As such, I have a mixed and neutral view of WNS. Company Description In its media releases, WNS refers to itself as a \"provider of global digital-led Business Process Management (BPM) solutions.\" WNS' BPM offerings include \"back-office administration, data management, customer experience services management, and auto-claims handling services\" as detailed in the company's FY 2024 (YE March 31, 2024) 20-F filing. WNS' Business Segments Categorized By Sector WNS' FY 2024 20-F Filing As per the chart presented above, WNS has four key business segments, BFSI, TSLU, MRHP, HCLS which contributed 35%, 31%, 24%, and 13% of the company's FY 2024 top line, respectively. The percentages don't add up to 100% due to \"inter and intra segment eliminations\" as explained in WNS' 20-F filing. Separately, WNS is geographically diversified with North America, UK, and Europe (excluding UK) representing 47%, 28%, and 8% of its total revenue, respectively for FY 2024. Australia, South Africa, and other geographical markets accounted for 7%, 1%, and 9% of WNS' latest fiscal year sales, respectively. The company also revealed in its media releases that it boasts a network of \"64 delivery centers\" around the world. Spotlight Is On Downward Revision Of FY 2025 Guidance Rather Than Q2 Earnings Beat On October 17, 2024 before the market opened, WNS issued a press release disclosing the company's financial results for the second quarter of FY 2025 (YE March 31, 2025). WNS' share price fell by -11% at the end of the October 17 trading day, and this implies that the spotlight is on the company's guidance cut as opposed to its latest quarterly bottom-line beat. The company's most recent Q2 FY 2025 EPS surpassed the Wall Street analysts' consensus forecast by +12.8%. But this is a \"low-quality\" earnings beat, as WNS' top-line fell short of expectations and its bottom line was boosted by a non-recurring, non-operating item. WNS' non-GAAP or normalized revenue decreased by -4.4% YoY to $310.7 million in Q2 FY 2025, which came in -1.1% lower than the market's consensus estimate. \"Lower volumes in the online travel segment\" and \"reductions in discretionary project work\" were cited as the key headwinds contributing to the company's recent quarterly top-line contraction, according to its Q2 FY 2025 earnings release. It will be fair to think that a challenging macroeconomic environment has led to weak travel demand and the deferral of non-essential projects, which in turn resulted in lower revenue and a top-line miss for WNS. The company's normalized or non-GAAP EPS rose from $1.10 in Q2 FY 2024 to $1.13 for Q2 FY 2025. But WNS' effective tax rate was 9% in the most recent quarter, or way lower than the company's 22% effective tax rate in the second quarter of fiscal 2024. WNS attributed the decline in effective tax rate to \"a one-time tax benefit primarily from the reversal of a deferred tax liability on intangibles\" in its Q2 FY 2025 results release. Apart from the \"low-quality\" bottom-line beat, WNS' updated FY 2025 financial guidance was a negative surprise. WNS' lowered the mid-point of its expected FY 2025 non-GAAP adjusted revenue and EPS by -4% and -7%, respectively when it released its Q2 results. Specifically, WNS anticipates that its normalized top line and bottom line will decrease by -1% and -4% to $1,273 million and $4.24 per share, respectively for FY 2025. As a comparison, the company's actual FY 2024 revenue and EPS grew by +11% and +14%, respectively. At its Q2 FY 2025 analyst briefing, WNS indicated that the company's revised full-year outlook has taken into consideration expectations of \"ongoing reductions in online travel volumes and no improvement in discretionary project spend.\" In other words, the negative factors which hurt WNS' Q2 FY 2025 performance are likely to persist for the remainder of this fiscal year. Also, WNS mentioned in its Q2 earnings release that it is targeting to close \"large deals\" to \"position the company for revenue acceleration in fiscal 2026\", which implies that any potential turnaround will be a FY 2026 story. It is hard to be bullish on WNS for the near term, when a meaningful turnaround for the company is unlikely to happen soon. Potential Value-Accretive Capital Allocation Initiatives Could Limit Further Downside WNS' consensus next twelve months' EV/EBITDA multiple has already compressed from 12 times a year ago to 8 times now as per S&P Capital IQ's valuation data. I am unwilling to be bearish on WNS, as I think that further valuation de-rating for the stock might be limited by potential value-accretive capital allocation moves. As of September 30, 2024, WNS had cash and investments amounting to $221.5 million on its books, which is equivalent to approximately 11% of its market capitalization. The company has a share repurchase program that allows it to buy back 4.1 million of its shares between May 30 this year and November 29 next year. WNS repurchased 2.8 million of its own shares in 1H FY 2025 and still had 1.3 million shares (or around 3% of its shares outstanding) remaining from its buyback authorization as of September 30, 2024. WNS' current EV/EBITDA ratio is significantly below its historical five-year mean of 14 times based on S&P Capital IQ data. As another comparison, the company's historical FY 2017-2024 (assuming seven years as a full business cycle) EBITDA CAGR was +16%. A valuation rule of thumb has a fairly valued stock trading at an earnings multiple equal to its earnings growth rate. It will be reasonable to think that a low-to-mid-teens EV/EBITDA multiple will be a fair valuation metric for WNS, considering its historical valuation mean and EBITDA growth rate. As such, it will be accretive for WNS to buy back its own shares at current valuation levels. WNS stressed at its Q2 FY 2025 earnings call that the company \"might consider doing an aggressive (share) repurchase\" prior to end-FY 2025 (March 31, 2025) assuming that it is \"not able to find effective utilization of this cash.\" In other words, the company is possibly thinking of completing its 4.1 million shares buyback plan earlier by March 31, 2025, rather than November 29, 2025, when the repurchase program expires. In this scenario, WNS' potential full-year FY 2025 buyback yield could be close to 9%, which should provide support for the company's share price to some extent. Alternatively, WNS could allocate capital to acquisitions to boost the company's inorganic growth prospects. The company indicated at its latest quarterly results briefing that it is \"looking at strategic M&A opportunities.\" WNS has traditionally focused on \"tuck-in acquisitions, which are in adjacent areas to our core business\" as per the company's comments at the JPMorgan (JPM) 2023 Ultimate Services Conference in November last year. As such, the risk of the company diversifying into unrelated business areas with mega deals which are difficult to integrate is reasonably low. More importantly, the difficult economic environment, which has affected WNS' near-term results and prospects, might enable the company to acquire smaller, high-quality businesses at attractive valuations. When economic conditions are tough, there will be good companies suffering from temporary issues, and this presents an opportunity for WNS to hunt for bargains. In summary, WNS has a meaningful amount of cash that can be utilized for value-accretive capital allocation moves like share repurchases and acquisitions. WNS' valuations have already de-rated significantly as compared to a year ago, and I believe sensible capital allocation initiatives will limit the downside for the company's shares. Closing Thoughts  My rating for WNS is a Hold. I have considered the company's results, guidance, valuations, and capital allocation in making this decision. WNS' recent quarterly performance and updated guidance are disappointing, but the stock's valuations are reasonably attractive with potential capital allocation-related catalysts like buybacks and M&A.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2476429970"}