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Mixed operating performance; restructuring costs lead to profit miss

Wipro reported mixed operating performance in Q2, wherein revenue growth was a tad better than expectations, while margins disappointed. Management remain cautiously optimistic on growth prospects, and are closely monitoring the possible impact of macro uncertainties on demand. Company signed 11 large deals with combined TCV of USD0.7bn in Q2. Overall order book in TCV terms grew 23.8% YoY in Q2. The company has guided to 0.5-2% QoQ CC revenue growth in IT Services for Q3, broadly in line with our expectations of 0-2%. EBITM has expanded 10bps to 15.1% in Q2, but came in lower than our expectations and is likely to remain in the narrow range in Q3. Commentary by Management remains fairly confident on double-digit revenue growth in FY23. However, it shied away from giving any timeline on the margin returning to the medium-term target range of 17-17.5% which remains an irritant. We cut our earnings by 0.2% to 3.9% for FY23E-25E, factoring-in the Q2 performance. Lack of clarity on margin recovery is expected to weigh on valuation, in our view. We maintain BUY on the stock, with TP of Rs460/share at 17x Sep-24E EPS (earlier Rs470).

Results summary: Revenue grew 2.3%/8.4% QoQ/YoY (CC 4.1%/12.9% QoQ/YoY) to USD2.8bn, above our expectations of 3.7% CC QoQ. IT Services’ EBITM expanded by ~10bps sequentially to 15.1%, at 20bps below our estimates. PAT stood at Rs26.6bn (3.7% QoQ, -9.3% YoY), lower than our estimates primarily on account of one-time restructuring costs (~Rs1.4bn) and lower other income. Revenue growth was led by the Energy, Natural Resources & Utilities (6.6% QoQ CC), Manufacturing (6.2%), and Consumer (5.5%) verticals. Wipro has guided to 0.5-2% QoQ CC growth in Q3 and expects to clock double-digit growth in FY23, considering its H1 performance, progress made on client mining, steady deal intake, broad-based demand and healthy deal pipeline. Wipro continues to see strong demand for cloud, digital, cyber security, engineering and data analytics. What we liked: Broad-based revenue growth, in-line Q3 guidance; steady order book; steady progress on client mining. What we did not like: EBITM miss and lack of clarity on margin recovery timelines.

Earnings-call KTAs: 1) IT Services’ EBITM expanded 10bps QoQ on account of operational improvements (+40bps), SG&A (+30bps), and currency movement (+30bps), partly negated by impact of salary hikes and promotions (-90bps). 2) Growth was led by Cloud transformation (26% YoY), Application & Data (21%), Engineering Services (18%) and Cyber Security (23%). 3) It signed 11 large deals with a combined TCV of USD0.7bn in Q2. While clients are apprehensive owing to prevailing macro uncertainties, the deal pipeline remains robust, with deals well balanced between growth, transformation and cost-takeout projects. Management expects cost takeout and operational efficiency deals-share to increase in the near term. 4) The company saw LTM voluntary attrition moderation of 30bps to 23%, clocking the third straight quarter of temperance; more easing is expected further. 5) Management highlighted weakness in the consulting-service line and softness in the tech and retail sectors. 6) Management indicated that EBITM has bottomed out at ~15%; however it did not provide any timeline on margin returning to the medium-term target range of 17-17.5%. 7) Restructuring costs of ~Rs1.4bn pertain to actions aimed at correcting inefficiencies and realigning the talent/skills pool, largely in Europe.

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