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Strong operating performance

* Wipro’s IT services revenue grew 6.9% QoQ (8.1% CC; 4.6% organic) to USD2.6bn in Q2FY22, a tad ahead of our estimates. IT services EBITM declined 10bps QoQ to 17.7% as revenue momentum and operating efficiencies largely negated wage hikes and investments in sales, capabilities and talent.

* Wipro guided for IT services revenue to be in the range of USD2,631-2,683mn in Q3, implying 2-4% QoQ growth. Management remains fairly confident of delivering doubledigit organic revenue growth in FY22. It reiterated EBITM guidance of 17-17.5% for FY22.

* Wipro signed 9 large deals with a combined TCV of USD580mn in Q2. Management indicated that 18% growth in deal TCV wins in H1 (ACV – 29%) and robust deal pipeline across markets with a good mix of small and large deals give good revenue visibility.

* We raise FY22E/FY23E/FY24E EPS by 1.8%/3.4%/4.3%, factoring in Q2 performance and sustained growth momentum. We retain Hold with a revised TP of Rs680 at 25x Sep’23E EPS (earlier 23x).

What we liked?

Broad-based revenue growth, healthy large deal intake (USD580mn), inline Q3 guidance

What we did not like?

Poor OCF generation (56% OCF/EBITDA in Q2), voluntary TTM attrition rate rising to 20.5% vs. 15.5% in Q1FY22

Broad-based revenue growth performance:

Revenues grew 6.9% QoQ to USD2.6bn (4.6% organic) in Q2FY22. Growth was ahead of guidance, both organically and inorganically (Capco and Ampion). Revenue growth was broad-based, led by BFSI (12.5% QoQ CC), Consumer (7.7%), Communications (8.9%), Technology (7.0%) and Health (5.5%). Wipro has guided for 2-4% QoQ growth in Q3, considering progress made on client mining, solid deal intake, broad-based demand and a healthy deal pipeline.

Wipro expects to sustain growth momentum in FY22. Wipro has closed 9 large deals with TCV of USD580mn. Management indicated that deal TCV grew 18% YoY in H1, while ACV grew 29%. Management said that the deal pipeline is closer to an all-time high and includes a good mix of small, mid-sized and large deals. Quality of the pipeline is also improving, with higher contributions from focus clients and service offerings (Cloud pipeline has crossed USD8bn). The cloud ecosystem contributed ~30% of revenue and grew ~27% in H1.

EBITM down 10bps QoQ:

Despite salary hikes (for ~80% of employees) and investments into sales, capabilities and talent, the decline in IT services EBITM was restricted to 10bps to 17.7% due to revenue acceleration and operating efficiencies (utilization, offshoring, automation and realization).

Wipro expects that supply-side challenges, increased hiring costs and investments in front sales would weigh on margins. However, revenue acceleration and strong operational rigor (automation, offshoring, employee pyramid, etc.) would support margins. Management expects to sustain EBITM within a narrow range.

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