JPMorgan Upgrades WNS Holdings To Overweight

JPMorgan has upgraded WNS (Holdings) Limited (ADR)

to Overweight from Neutral, saying that the company's "above average growth should help close valuation gap with its peers" who trade in high teens/low twenties. "WNS's growth profile appears to be improving, and we expect continued double digit growth in FY18. We estimate WNS earnings will grow at 7% over the next two years (2015-17) and our price target ($36) implies a 142.1% premium to the earnings CAGR," analyst Puneet Jain wrote in a note. Jain, who raised the price target on the stock by $3 to $36, said WNS' fourth quarter growth of 13 percent in constant currency should prove to be "above industry average." Going forward, the analyst expects continued above average growth rates, driven by the three large contracts signed in the third quarter and several new contracts signed in the fourth quarter. The analyst highlighted that WNS' recent wins are coming in relatively higher end analytics area. In addition, Jain sees headwinds from lower revenue related to AVIVA and Auto should ease. In fact, WNS is expected to benefit from AVIVA's Friends Life acquisition, which could potentially offset volume declines in core AVIVA business. "Auto Claims business might continue declining, but we expect much more modest rates after it recently got the legal firm status in the UK (was down 3% in F4Q)," Jain continued. Mumbai, India-based WNS expects 19-20 percent margins over the long term, excluding hedge gains (or loss), about inline with its FY16 margins and compared with peers' margins in mid teens. "We expect such high margin levels should be sustainable as the company benefits from tighter cost control (seat utilization is generally higher than peers'), and higher offshore mix," Jain noted. Near term, the analyst still sees 20 percent plus margins in FY17 as "advanced hiring in F2H16 should result in higher incremental margins." The analyst revised FY17 revenue/adj EPS estimates to $581 million/$1.95 from $579 million/$2.04. On Thursday, WNS reported adjusted EPS of $0.50 topping Street view of $0.46 and revenue came in line with Street at $135 million. The company provided FY16 outlook that calls for EPS of $1.84-1.98 on revenue of $551 million - $583 million. ADRs of WNS were 1.12 percent to $31.52.