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Growth remains elusive, Margins under pressure

WPRO Q1FY27 performance was broadly in line with our rev. est., with IT Services revenue declining 1.2% QoQ CC (vs. our estimate of -1.3%), while EBIT margin at 16.0% missed our est. of 16.7% due to the combined impact of wage hikes, large deal rampup costs and continued investments in AI capabilities. Management highlighted encouraging traction in BFSI, particularly in Europe and APMEA. It expects the vertical to recover in Q2 supported by ramp-up of earlier wins and increasing AI-led spending. The management reiterated that AI is expanding the addressable market, it also acknowledged that clients are increasingly reallocating discretionary budgets from traditional IT toward AI, governance & compliance initiatives, resulting in slower conversion of legacy spending in the near term. Despite steady deal momentum (USD 3.4 bn bookings including USD 1.6 bn large deal TCV), Q2 revenue guidance of -1.5% to +0.5% QoQ CC was discouraging. Consequently, we lower our IT Services rev. est. to flat CC in FY27E (1.5% CC earlier) and 1.6% CC growth in FY28E (2.5% CC earlier). We also reduce our IT Services EBIT margin est. to 16.7%/17.0% for FY27E/FY28E (from 17.0%/17.1%) following the Q1 margin miss. We believe slower revenue conversion and continued investments in AI capabilities would continue to weigh on margins, making it difficult for the company to achieve the aspirational band (17.0–17.5%). Our revised estimate translates to an EPS downgrade of ~3.5% for both FY27E and FY28E. We assign a PE of 12x to FY28E EPS to arrive a TP of INR 165 (earlier INR 170) and downgrade to REDUCE (HOLD earlier).

Revenue:

IT Services revenue was USD 2.61 bn, down 1.2% QoQ in CC, largely in line with our and consensus est. of 1.3% QoQ CC decline. Growth was muted due to weakness in EM&R and Healthcare segments particularly in America region. Segment wise Health. EM&R and BFSI declined by 2.6%, 3.6% & 1.2% QoQ CC respectively while Tech & Consumer grew by 0.2% & 0.7% QoQ CC. Geography wise APMEA grew by 4.4% QoQ CC while Americas 1, Americas 2 & Europe declined by 2.3%, 2.5% & 0.9% respectively.

Operating Margin:

IT Services EBIT margin declined by 130 bps QoQ to 16.0%, below our and consensus est. of 16.7%. Margin declined due to the headwinds of wage hike, slow ramp up of large deals, and ongoing investments in AI, which was partially offset by rupee depreciation benefits and other operational efficiencies

Deal Wins:

Deal wins were steady, with TCV of USD 3.37 bn compared to 3.46 bn in Q4. During the quarter WPRO won 13 large deal wins with TCV of USD 1.63 bn, up 12.9% QoQ CC.

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