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Adverse macros posing conversion challenges Softness continues; another quarter of weak revenue guidance

* Wipro (WPRO) reported a 2% QoQ constant currency (CC) decline in revenue in the IT Services business for 2QFY24. This was at the lower end of its guidance band due to a broad-based decline in its key verticals(BFS, Communication, and Manufacturing). Despite healthy deal wins, the softness is expected to continue in 3QFY24 as the company has guided for a revenue performance in the range of -1.5% to -3.5% CC. Given WPRO’s broader presence in the discretionary areas, the conversion is a challenge as enterprises are cautious and are reprioritizing expenditures.

* EBIT margin (IT Services) was flat (+10bp QoQ) at 16.1%, above our estimated decline of 20bp QoQ. 3QFY24 will have an impact from the wage hikes that will pressurize margins for 2HFY24. Revenue growth is also likely to be weak and would be unable to restrict the adverse margin impact.

* Despite a healthy deal pipeline and having delivered a robust deal TCV of USD3.8b (BTB 1.4x) in 2Q, the conversion remains a challenge in the near term. 3Q is a seasonally soft quarter, and the management expects the degree of impact from furloughs to be higher than the earlier trend, which led to deliver another quarter of weak topline growth guidance. Management indicated that slower decision-making and cuts in discretionary spends should hurt 3QFY24. We are factoring in a CC revenue decline of 4.4% in FY24E followed by an uptick in FY25E (+7.3% CC), as we expect demand recovery to come through in FY25.

* In terms of margins, the company delivered an IT Services EBIT margin of 16.1%, above our expectation, and at the bottom end of its comfort range. However, we expect a dip in the operating margin in 3Q due to a wage hike, followed by a sharp recovery in 4Q. Additionally, the missing operating leverage in 3Q is less likely to absorb the overall wage hike impact and weigh on the FY24 margins. We expect FY24/FY25 IT Services margins to be at 14.6%/15.6%, below the management’s medium-term guided range of 17.0- 17.5%, and translating into a 4.0% INR PAT CAGR over FY23-25E.

* We cut our FY24E/FY25E EPS by 8.2%/5.0% to factor in a weaker FY24E growth due to the third quarter of expected decline. Reiterate Neutral as we view the current valuation as fair. Our TP of INR418 implies 18x FY25E EPS.

Weak revenue growth, disappointing 3Q guidance

* In 2QFY24, revenue from IT Services declined 4.8% YoY in CC terms (2.0% QoQ CC drop), INR EBIT was up 2.6% YoY, and INR PAT was down 0.5% YoY.

* EBIT margin in IT Services was up 10bp QoQ at 16.1%, above our estimate.

* WPRO’s 3QFY24 revenue guidance was again disappointing at -1.5% to -3.5% in CC terms.

* WPRO reported the third consecutive quarter of headcount decline by 5,051 vs. 8,800 in 1Q. Net utilization (excl. trainees) improved to 84.5% (vs. 83.7% in 1Q). Attrition (LTM) was down 180bp QoQ to 15.5% during the quarter.

* WPRO’s net profit fell 0.5% YoY to INR26b; below our estimate of INR29b.

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