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Muted quarter, but the uptick in consulting a positive

Subdued revenue growth guidance for the next quarter

* Wipro (WPRO) reported 1QFY25 IT Services revenue of USD2.6b (-1.0% QoQ) in constant currency (CC), 50bp below our estimate. It posted an order intake of USD3.2b (-9.0% QoQ), with a large deal TCV of USD1.1b (-3.0% QoQ). The EBIT margin of IT Services was 16.5% vs. our est. of 17.3%. EBITDA rose 1.5% QoQ/6.0% YoY to INR44b (in line). PAT stood at INR30b (+6.0% QoQ/+4.6% YoY), slightly above our est. of INR29b. WPRO’s guidance was muted, with 2QFY25 USD CC revenue growth guidance in the range of -1.0% to +1.0% QoQ.

* While the commentary on the overall demand environment was noncommittal, the uptick in the Capco business across the US and Europe reaffirms the recovery trends witnessed in the recent results.

* We see WPRO’s 2QFY25 revenue growth guidance as subdued. While we expect the company to rebound to growth in FY26, in line with the industry, it should continue to lag its peers.

* WPRO’s EBIT margin improved 10bp, below our est. of ~90bp QoQ improvement, despite a delay in wage hikes. Fixed-price productivity, improvement in the pyramid, onboarding of freshers, optimization of overhead costs, and some synergies of the acquired entities at play could be the key levers. However, volume recovery is a key monitorable.

* We expect the company to deliver FY24-26E IT Services revenue CAGR of 1.4%. We expect WPRO to clock ~16% operating margin in FY25, which should translate into an 8.0% CAGR in INR PAT over FY24-26.

* We have cut our FY25E EPS by 1% and kept FY26E EPS broadly unchanged after its 1Q print. We reiterate our Neutral rating as we view the current valuation as fair. Our TP implies 20x FY26E EPS.

IT Services revenue and margins miss estimates

* IT Services revenue of USD2.6b, declined 1.0% QoQ in CC (reported USD revenue was down 1.2% QoQ), below our estimate of 0.5% QoQ CC decline.

* Mfg (-3.0% QoQ CC), Comms (-1.8% QoQ CC), Energy & Utilities (-6.3% QoQ CC), and Technology (-0.5% QoQ CC) were adversely impacted, whereas BFS (0.5% QoQ CC) and Retail (1.6% QoQ CC) performed well.

* IT Services EBIT margin was 16.5% (up 10bp QoQ), below MOFSLe of 90bp expansion QoQ.

* WPRO’s 1Q TCV of USD3.2b, declined 9.0% QoQ, while Large TCV of USD1.5b was down 4.0% QoQ.

* WPRO’s 2QFY25 revenue guidance was again disappointing, at -1.0% to +1.0% in CC terms.

* Headcount additions stood at 337, after the sixth consecutive quarter of decline (vs. -6,180 in 4Q). Net utilization (excl. trainees) improved to 87.7% (vs. 86.9% in 4Q). Attrition (LTM) was down 10bp QoQ to 14.1% ? Net profit of INR30b, up 5.2% YoY, was above our estimate of INR29b.

Key highlights from the management commentary

* Management alluded to the fact that the market has not changed fundamentally in terms of demand, with positive momentum among the US consumers, Capco business, and BFSI sectors. The macro environment remains uncertain, however, leading to softness in discretionary spending.

* WPRO is driving large deals by seeking proactive engagements, securing 10 large deals in 1Q. The company is continuing to invest in established and high-priority accounts. Revenue from top clients grew despite the soft demand environment. Focused on driving execution with speed. Incorporating various GenAI solutions in the offerings in order to increase productivity and quality of products.

* Capco had sequential growth across the US and Europe. Capco is a consultancyled business and is experiencing good demand in the financial services segment. Rising business is strong in the Fashion & Retail vertical and SAPHANA.

* The deal tenure is becoming shorter, and 3-5 year deals are becoming more prominent. Management indicated that GenAI is now moving from an experimental stage to a commercial stage, where every large deal has some components of GenAI to develop use cases and AI models.

Valuations & View

* We expect the company to deliver FY24-26E IT Services revenue CAGR of 1.4%. We expect WPRO to clock ~16% operating margin in FY25, which should translate into an 8.0% CAGR in INR PAT over FY24-26.

* We have cut our FY25E EPS by 1% and kept FY26E EPS broadly unchanged after its 1Q print. We reiterate our Neutral rating as we view the current valuation as fair. Our TP implies 20x FY26E EPS.

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