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Steady performance marred by one-off restructuring costs

Wipro reported steady operating performance in Q1, though one-off restructuring costs led to a miss on reported EBITM. IT Services revenue declined 0.3% QoQ to USD2.59bn (down 2% CC), in line with our expectations. Overall EBITM declined by 120bps QoQ due to one-off restructuring costs of ~Rs2.5bn in Europe, missing our estimates, while EBITM for IT Services matched our expectations. Deal intake remained strong at ~USD5bn in Q1 (includes large-deal bookings worth ~USD2.7bn), with book-to-bill of 1.9x. The management gave revenue growth guidance of -1% to 1% CC QoQ in Q2, in line with our estimates. While macro and geopolitical uncertainty remains elevated, the management is confident of growth acceleration in H2 on the back of strong deal intake, robust deal pipeline, and improved execution rigor. The management indicated pressure on margins in the near term due to anticipated ramp up of competitively-priced large deals and initial investments in such deals, although it refrained from quantifying the overall impact. We prefer to wait for clarity on the margin trajectory before taking a more constructive view. We trim FY26-28E EPS by ~1%, factoring in the Q1 performance; retain REDUCE with TP of Rs280 at 20x Jun-27E EPS.

Results Summary

Wipro’s IT Services revenue declined 0.3% QoQ (down 2% CC) to USD2.59bn. IT Services EBITM declined by 20bps QoQ to 17.3%, in line with our expectations. Overall EBITM fell by 120bps QoQ to 16.1% due to one-off restructuring costs in Europe. The BFSI, Consumer & Energy, and Manufacturing & Resources verticals fell CC QoQ by 3.8%, 4.0%, and 0.7%, while Health and Tech & Communications rose 0.5% and 0.4%, respectively. Of its strategic business units, Europe and Americas 2 reported sequential revenue decline of 6.4% and 1.7% CC QoQ, while Americas 1 and APMEA grew 0.2% and 0.6%, respectively. Total headcount was largely flat QoQ at 233,232. Attrition (TTM) increased to 15.1% vs 15.0% in Q4. Wipro declared interim dividend of Rs5/share. What we liked: Healthy deal intake, strong cash conversion (OCF/EBITDA: 96.6%). What we did not like: Continued weakness in Europe, reported EBITM miss.

Earnings Call KTAs

1) Wipro began the quarter facing significant macro uncertainties, which kept the demand environment subdued. Clients focused on cost optimization and vendor consolidation, while simultaneously accelerating investments in AI, data, and modernization initiatives. 2) The BFSI sector was steady and strong, with clients emphasizing on AI-led efficiencies and IT transformation. 3) The Manufacturing, Retail, and CPG sectors were the most heavily impacted by tariffs. Even though discretionary budgets are tight, outsourcing renewals are creating new opportunities for wallet-share gain. 4) Healthcare continues to fare well, albeit payers faced cost pressures...(contd)…

…(contd)… Overall, the sector outlook is positive. 5) The Technology and Communication sectors are seeing a clear shift toward AI-driven investments. Clients are looking to innovate and future-proof their software and platforms. 6) Consumer and EMR clients are being more cautious in the current environment. 7) Discretionary spending is returning in select pockets like Data, AI, and Modernization, albeit not in a uniform manner. 8) Wipro closed 16 large deals during the quarter, including two mega deals in the BFSI sector. Such wins reflect a balanced mix of renewals and new business. A large deal in Tech and Communications has the potential to scale up, to becoming a mega deal. 9) TCV has been growing faster than ACV, driven by an increase in deal tenure; this trend is primarily due to higher mix of vendor consolidation and cost takeout deals, which typically involve long-tenure contracts. The pipeline is strong across geographies, and the management remains focused on converting it into deal wins at the earliest and thus accelerating the revenue momentum. 10) Capco grew 6% YoY on the back of growth in core markets as well as in newer markets like LatAm. It closed a USD1bn deal booking on TTM basis. 11) Various large deals are centered around cost takeouts and vendor consolidation, requiring upfront investments and entail a fair degree of cost pressure. 12) The management, in order to offset the pricing pressure, highlighted some margin levers, which are i) productivity improvements in fixed price programs, ii) improvement in profitability in acquired entities, iii) G&A optimization, iv) utilization, and v) pyramid optimization. 13) Per its capital allocation policy, the company plans to distribute 70% of net income at the minimum, over a block of three years. It intends to pay dividends twice a year – once during the June Quarter results and then during the December Quarter results.

Update on AI/Gen AI

1) Wipro is developing and deploying AI-powered agents and solutions at scale, with over 200 agents already implemented across use cases, such as lending, claims processing, and network management. 2) Clients are accelerating their AI investments, especially in data and modernization programs, with several AI projects moving from POC to production. 3) AI is becoming essential for business operations, with Wipro positioning itself as an ‘AI first, AI everywhere enterprise’ focused on solving complex challenges and transforming business models. 4) In the banking sector, clients are focusing on AI-led efficiency and transformation. 5) Specific AI use cases mentioned include fashion intelligence for retail product optimization, intelligent automation for credit risk operations, and AI-powered software development lifecycle improvements.

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