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Tariffs and macro uncertainty drive poor 1Q guidance

Margins likely to remain range-bound

* Wipro (WPRO) reported 4QFY25 IT Services revenue of USD2.6b, down 0.8% QoQ in constant currency (CC), below our estimate of flat QoQ. It posted an order intake of USD3.9b (up 12.5% QoQ), with a large deal TCV of USD1.8b (up 43% QoQ). EBIT margin of IT Services was 17.5% (est. 17.6%). EBITDA was flat QoQ and up 6.3% YoY at INR47b (est. INR48b). PAT stood at INR36b (+6.4% QoQ/+25.9% YoY), above our est. of INR33b. For FY25, revenue declined 0.6% YoY, whereas EBIT/PAT grew 11%/19% YoY (in INR terms). We expect revenue to remain flat YoY and EBIT/PAT to grow by 4.1%/3.0% YoY in 1QFY26. We reiterate our Sell rating on Wipro with a TP of INR215, implying 17x FY27E EPS.

Our view: Weak FY26 in the offing

* 1Q guidance reflects temporary freeze on client budgets: As per the management, client spends deteriorated toward the end of 4Q, and 1Q could see further impact. A soft guidance of 3.5% to 1.5% cc QoQ revenue decline reflects this. Will the situation become immediately better in 2Q? It’s too early to say. However, we believe 1QFY26 could be a quarter of declining revenues for Wipro and other large-caps overall. A poor exit in 4Q and the implied decline in 1Q drive our expectation of 1.9% YoY cc revenue decline in FY26E.

* Deal TCV strong, but revenue conversion continues to be weak: WPRO reported deal TCV of USD3.9b in 4QFY25, up 12.5% QoQ/9.6% YoY, while large TCV of USD1.8b was up 83% QoQ/48% YoY. Deal TCV was strong, but this has been the case over FY24-25, potential leakage and deferrals could lead to lower conversion.

* Margins stable, but further upside limited: WPRO again managed to deliver on margins as EBIT margins were flat QoQ. It has generally performed admirably on margins, but at 17.5% we believe we are at the upper end of the range and further gains could be limited. Further, the impending mega deal ramp-ups and soft revenues could put pressure on margins in the short term.

Miss on revenues, margins in line; 1Q guidance significantly below estimates

* IT Services revenue at USD2.6b was down 0.8% QoQ in CC (reported USD revenue was down 1.2% QoQ), below our estimate of flat revenue QoQ CC. FY25 revenue stood at USD10.5b, down 2.7% YoY.

* In 4QFY25, Energy & Manufacturing rose 1.1% QoQ CC, whereas Health (- 3.1% QoQ CC) and Consumer (-1.3% QoQ CC) were adversely impacted. BFSI and Technology were down 0.5/0.9% QoQ CC.

* 1QFY26 revenue guidance was -3.5% to -1.5% in CC terms.

* Americas1 grew 0.2% QoQ CC, while Europe/Americas2 declined by 2.5%/1.0% QoQ CC.

* IT Services EBIT margin was 17.5% (flat QoQ), in line with our estimate of 17.6%. For full year, IT Services margin stood at 17.1%.

* PAT was up 6.4% QoQ/25.9% YoY at INR36b (against our est. of INR33b). FY25 PAT stood at INR 131b. The company generated FCF of INR156b in FY25.

* WPRO reported deal TCV of USD3.9b in 4QFY25, up 12.5% QoQ/9.6% YoY, while large TCV of USD 1.8b was up 83% QoQ/48% YoY. For FY25, deal TCV stood at USD14.3b, down 3.8% YoY.

* Net utilization (excl. trainees) was up at 84.6% (vs. 83.5% in 3Q). Attrition (LTM) was down 30bp QoQ at 15%.

Key highlights from the management commentary

* Clients remain cautious amid macroeconomic uncertainty, even though the underlying demand for technology modernization remains strong.

* Many clients are engaged in scenario planning to evaluate the potential impact of tariffs, which led to delays or holdbacks in further investments.

* Large transformation projects are either paused or have had their timelines realigned. Some clients are also re-evaluating their IT budgets.

* Tariffs are directly affecting sectors such as Manufacturing and Consumer, with indirect effects being felt across other verticals.

* Guidance for 1QFY26 IT Services revenue was provided in the range of -3.5% to - 1.5% QoQ in CC terms. This reflects the company’s expectation that clients will maintain a cautious approach to large transformation programs and discretionary spending.

* Margin pressure is expected in 1QFY26 due to two headwinds: 1) the overall revenue environment and 2) pricing pressure in cost-takeout and vendor consolidation deals.

* The company aims to maintain margins within a narrow band going forward. Margin levers include sustaining or improving utilization, enhancing fixed-price productivity, and rationalizing overhead costs.

Valuations and view

We expect a 1.9% YoY cc revenue decline in FY26E, with operating margins at ~17.2%. We cut our FY26E/FY27E EPS estimates by ~4% to account for weak 1QFY26 guidance and sustained demand softness in key verticals and regions. We reiterate our Sell rating on WPRO with a TP of INR215, implying 17x FY27E EPS.

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