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Rough road ahead…

Wipro reported in-line revenue growth and negligible net headcount addition in Q2FY23 and guided for lower revenue in Q3FY23 than we expected. All of this supports our view that the sector is likely heading for a potential slowdown in demand due to ongoing macro-economic challenges. Wipro’s IT services revenue grew 2.3% QoQ USD, 4.1% QoQ CC (I-Sec: 4%, consensus: 4%). Growth was broad-based led by ENU (6.6% QoQ CC), manufacturing (6.2% QoQ CC) and consumer (5.5% QoQ CC).

Revenue growth guidance for Q3FY23 is 0.5-2% QoQ CC lower than our expectation of 1-3% QoQ CC. The guidance factors-in potential impact of likely furloughs in Q3, slowdown in consulting and an uncertain demand environment. Company’s overall orderbook grew at a healthy 24% YoY in Q2. Large deal bookings were up 42% YoY in H1FY23.Though the orderbook is healthy, management pointed at the change in demand environment (vs the accelerated demand witnessed in FY22) as clients are cautious and assessing the impact of macro headwinds. Wipro is witnessing slowdown in its consulting business (due to Capco and Rizing acquisitions). Management also mentioned that the technology vertical is slowing down while retail is likely to follow suit if the macro-situation worsens.

IT services EBIT margin improved slightly by 16bps QoQ to 15.1%. Margin headwinds from wage hikes effective 1st Sep’22 and quarterly promotions effective 1st Jul’22 were offset by lower SG&A costs, better productivity in fixed-price projects and favourable currency movements. Consolidated EBIT margin declined 40bps QoQ to 14% due to one-time restricting costs of Rs1,341mn pertaining to the European market.

Wipro reported very low net headcount addition of just 605, 0.2% QoQ, vs average of 11.3k net addition per quarter in FY22. Attrition remains elevated at 23% on LTM basis (-30bps QoQ) despite strong fresher hiring. Company added ~14k freshers in H1FY23. Low net headcount addition implies management is cautious amid low visibility on future demand.

We cut our USD revenue estimates by 0.6%/1.4% for FY23/FY24 respectively due to weak guidance for Q3FY23 and slowing demand in the consulting business. Our EPS estimates change by -1.2%/0.4% due to negative impact of USD revenue cut offset by positive impact of changing FX rate (USD/INR) assumption from 80 to 82. We continue to value Wipro at 15x FY24E earnings to arrive at a revised target price of Rs372. Company has the lowest RoIC and RoE among peers (Infosys, TCS), which also justifies our lower target multiple (table-2). We reiterate our REDUCE rating on the stock due to: 1) more headwinds than peers heading into macro slowdown as large acquisitions have increased the discretionary nature of business; 2) volatile orderbook; 3) lowest EPS CAGR in the pack at 5.3% over FY22-FY24E; 4) weak margin profile (IT services’ margins dropped to 15% in H1FY23 vs 17-18% pre-covid)

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