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Q1FY24 performance: Wipro IT services’ revenue declined 2.8% QoQ CC (-1.6% QoQ USD) lower than I-Sec and BBG consensus estimates of -1.3% QoQ USD and -1.8% QoQ USD, respectively. YoY CC growth in IT Services revenue was also soft at 1.1%. Softness in revenue growth was due to reduction in discretionary spends. Weakness in growth continued in the company’s two large verticals – BFSI (-4.3% QoQ CC) and consumer (-3.5% QoQ). IT services’ EBIT margin came in at 16% (-30bps QoQ). Consolidated EBIT margin at 15.1%, down 70bps QoQ, was lower than our and consensus estimates of 15.9% and 15.7%respectively. Overall PAT at Rs28,701mn was 8% lower than our estimate due to miss on revenue and margins, and higher tax rate.

Company reported muted total bookings of US$3.7bn, down 10% QoQ. Within total bookings, large deal bookings were healthy at US$1.2bn (+9% QoQ, +9% YoY) reflecting slowdown or drying up of smaller deals. Revenue guidance for Q2FY24 is soft at -2% to +1% QoQ CC, lower than our expectation of 0-2% QoQ. Management commentary did not provide any visibility of pickup in demand ahead. Wipro saw huge reduction (-2.8% QoQ, -3.4% YoY) in net headcount during the quarter.

What to do with the stock

Wipro’s Q1FY24 performance missed estimates on all fronts: a) EBIT missed our / Bloomberg estimates by 6%/4%, b) orderbook was weak (down 10% QoQ), and c) QoQ revenue growth guidance for Q2FY24 at -2% to +1% falls short of our expectation of 0- 2% growth. Based on the recently-announced results of ACN, TCS, HCL and Wipro (both ACN and Wipro’s guidance for the next quarter at mid-point are indicating further decline in revenues) and from demand commentary, it is evident that the companies aren’t seeing any immediate demand revival in Q2FY24 and that visibility of recovery in H2FY24 too is limited at this stage. This, we believe, could be largely due to multiple low-RoI discretionary projects executed over past 2 years now getting cancelled or seeing rampdowns amid adverse macro conditions – particularly in banking, retail, hi-tech and telecom verticals. Lack of visibility around the revival of these projects is dissuading company managements from guiding for strong recovery in H2FY24 in our view, despite decent orderbooking momentum – particularly in the case of our BUY-rated TCS. In the case of Wipro, we cut our EPS estimates sharply by 11%/9%/7% over FY24E/FY25E/FY26E due to weaker revenue growth, lower margins and higher tax rates. This leads to our revised 12-month target price of Rs319 implying 19% potential downside. Hence we downgrade Wipro to SELL (from Reduce). We believe that the FCF yield (of 4.7% in FY25E) may not be sufficient to justify a 2.4x PEG multiple where Wipro is currently trading at 17.2x FY25E for FY23-FY26E EPS CAGR of 7%.

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