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Healthy quarter, furlough softness ahead

Guides for -2% to 0% revenue growth in 3Q

* Wipro (WPRO) reported 2QFY25 IT Services revenue of USD2.6b (0.6% QoQ) in constant currency (CC), 60bp above our estimate. It posted an order intake of USD3.6b (+9.6% QoQ), with a large deal TCV of USD1.5b (+30% QoQ). EBIT margin of IT Services was 16.8% (est. 16.0%). EBITDA rose 2.7% QoQ/7.8% YoY to INR46b (est. INR44b). PAT stood at INR32b (+6.8% QoQ/+21.3% YoY), above our est. of INR29b. For 1HFY25, revenue declined 2.3%, whereas EBIT/PAT grew 7.9%/12.8% compared to 1HFY24. WPRO’s has provided muted guidance for 3QFY25, as it expects USD CC revenue performance in the range of -2.0% to 0.0% QoQ.

Our view: Robust quarter

* WPRO had a strong quarter with healthy revenue growth and robust deal momentum. The company continued to secure large deals in 2Q, with the total contract value (TCV) up 8% QoQ. WPRO’s deal pipeline is also strong, particularly in the BFSI sector, which is witnessing a pickup in discretionary spending.

* However, there are areas of concern that warrant cautiousness. The guidance for 3QFY25 is muted (-2% to 0% in CC) due to furloughs and softness in key regions, particularly in Europe.

* Additionally, sectors like manufacturing and energy remain soft, with signs of a potential revival but no immediate turnaround making these verticals more of a long-term play.

* Guidance: Revenue performance from IT Services business segment is expected to be in the range of -2.0% to 0.0% in CC terms.

* Margins: Looking ahead, WPRO is confident of maintaining margins within the narrow range of 17-17.5%. Despite partial wage hike headwinds in 3Q, there are margin tailwinds, including improving employee utilization (which dipped slightly in 2Q but remains a lever for future quarters), increasing offshoring, and fixed-cost projects.

Valuation and change in estimates

* We expect the company to deliver FY24-27E IT Services revenue CAGR of 3.0%. We expect WPRO to clock ~16% operating margin in FY25, which should translate into a 7.2% CAGR in INR PAT over FY24-27.

* We have raised our FY25E EPS by ~2% to factor in the margin beat and kept FY26/FY27E EPS broadly unchanged after its 2Q print. We reiterate our Neutral rating as we view the current valuation as fair. Our TP of INR500 implies 20x Sep’26E EPS

Beat on revenues and margins; 3Q guidance muted

* IT Services revenue at USD2.6b grew 0.6% QoQ in CC (reported USD revenue was up 1.3% QoQ), above our estimate of flat QoQ CC.

*  BFS (+2.7% QoQ CC), Technology (+1.6% QoQ CC) and Retail (+0.3% QoQ CC) performed well, whereas Manufacturing (-2.0%% QoQ CC), Energy and Utilities (-3.7%% QoQ CC), and Health (-0.5% QoQ CC) were adversely impacted.

* Americas1/Americas2 grew 1.2%/0.8% QoQ CC, while Europe declined slightly by 0.1% QoQ CC.

* IT Services EBIT margin was 16.8% (up 30bp QoQ), 80bp above our estimate of 16.0%.

* 2Q TCV of USD3.6b was up 9.6% QoQ/down 4.9% YoY, while large TCV of USD 1.5b was up 30.0% QoQ/15.4% YoY.

* 3QFY25 revenue guidance was -2.0% to 0% in CC terms.

* Net utilization (excl. trainees) declined to 86.4% (vs. 87.7% in 1Q). Attrition (LTM) was up 40bp QoQ at 14.5%.

* Net profit rose 6.8% QoQ/21.3% YoY to INR32b (est. INR29b).

* WPRO also announced a bonus in a ratio of 1:1, pending shareholder approval

Key highlights from the management commentary

* There are good deals in the pipeline. The company is focusing on vendor consolidation and cost takeout initiatives. US elections are not expected to significantly impact deal closures

* Discretionary spending in BFSI and Capco has seen good traction in smaller deals.

* 3Q guidance: -2% to 0% in CC. Softness in Europe is factored into the guidance.

* 3Q revenue will face headwinds due to furloughs (expected at last year's level) and fewer working days.

* In Europe, there is a slowdown in demand due to client-specific issues in a few accounts, with ramp-downs as some clients change direction. It will focus on closing deal bookings in 3Q, building on the existing pipeline.

* TCV to revenue conversion: Large deals will take several quarters to ramp up. Overall, no concerns about conversion, with a focus on winning deals.

* IT services revenue stood at USD2.6b, up 0.6% QoQ in CC, bringing it closer to the upper end of the guidance.

Valuations and View

* We expect WPRO to deliver a CAGR of 3.0% in IT Services revenue over FY24- 27E. We estimate WPRO to clock ~16% operating margin in FY25, which should translate into a 7.2% CAGR in INR PAT over FY24-27E.

* We have raised our FY25E EPS by ~2% to factor in the margin beat and kept FY26E/FY27E EPS broadly unchanged after its 2Q print. We reiterate our Neutral rating as we view the current valuation as fair. Our TP of INR500 implies 20x Sep’26E EPS

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