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* Wipro (WPRO) reported a revenue decline of 2.8% QoQ CC in IT Services business in 1QFY24, due to adverse macro and a slowdown in discretionary spends in key verticals like BFS, Consumer and Hi-Tech. Despite healthy deal wins, the softness is expected to continue in 2Q, as the company has guided for revenue performance of -2% to +1% CC in 2QFY24. Given WPRO’s boarder presence in the discretionary areas, the conversion is a challenge as enterprises are cautious and are reprioritizing spends.

* EBIT margin (IT Services) was down 30bp QoQ at 16.0%, in line with our estimate. Amid macro uncertainties, the management is confident of maintaining the margin in 2Q by deferring the wage hike cycle to 3Q.

* WPRO’s weak 2Q revenue growth guidance, along with the absence of nearterm demand visibility, is likely to more than negate the continued strength in deal momentum over the last few quarters. The management indicated that slower decision-making and cuts in discretionary spends should affect 2QFY24. Moreover, the revenue decline in 1HFY4 would result in WPRO delivering a rare revenue decline in FY24 (MOFSLe at -1.7% YoY CC), which is unlikely to help share price despite inexpensive valuations. We are factoring in USD revenue CAGR of 5.8% over FY23-25E, as we expect the company to see a pickup in FY25.

* In terms of margin, the company delivered IT Services EBIT margin of 16.0%, in line with our expectation and at the bottom end of its comfort range. More importantly, despite deferring the wage hikes and a sharp decline in net headcount, WPRO expects the softness in profitability to continue in the near term on account of adverse operating leverage. We expect FY24/FY25 IT Services margins to be at 15.8%/16.6%, below the management’s medium-term guided range of 17.0-17.5%, and translating into an 8.4% INR PAT CAGR over FY23-25.

* We cut our FY24E/FY25E EPS by 3.5%/4.9% to factor in weaker FY24E growth due to a weak start in 1QFY24 and higher share count. Reiterate Neutral as we view the current valuation as fair. Our TP of INR380 implies 16x FY25E EPS.

Disappointing 2Q guidance

* In 1QFY24, revenue from IT Services declined 1.1% YoY in CC terms (2.8% QoQ CC decline), INR EBIT was up 8.2% YoY, and INR PAT rose 12% YoY.

* EBIT margin in IT Services was down 30bp QoQ at 16.0%, in line with estimate.

* WPRO’s 2QFY24 revenue guidance was again disappointing at -2.0% to +1.0% in CC terms.

* Headcount declined significantly by 8.8k in 1QFY24. Net utilization (excl. Trainees) improved 83.7% (vs. 81.7% in 4QFY23). Attrition (LTM) was down 190bp QoQ at 17.3%.

* Net profit grew 12% YoY to INR29bn, in line with our estimate.

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