Monday, April 22, 2024

Wipro Sees Steady Performance; Green Shoots Not Yet Visible In Q1 Guidance

Wipro reported steady performance in Q4 — revenue grew 0.1% QoQ to USD2.65bn (-0.3% CC), tad better than our estimates. Growth was aided by Top- 10 clients, which added ~USD40mn QoQ, on the back of large-deal ramp up. IT Services EBITM of 16.4% was slightly higher than our estimate. The new CEO, Srini Pallia, highlighted five focus areas: 1) Accelerate large deal momentum. 2) Strengthen relationship with large clients. 3) Focus on industry-specific offerings, led by consulting and infused with AI. 4) Build an AI-ready skilled workforce. 5) Continue to simplify the operating model. Wipro has guided for -1.5% to 0.5% revenue growth in Q1, with the mid-point of the guidance being 50bps lower than our estimate. While the macro environment remains uncertain with further challenges in the short run, the management is seeing some green shoots and remains focused on execution rigor with speed to accelerate growth. We tweak our FY25E/26E EPS by less than 1%, factoring in-line Q4. We retain ADD with unchanged TP of Rs500/sh at 19x Mar-26E EPS.

Results Summary

Wipro’s IT services revenue grew 0.1% QoQ (0.3% QoQ decline in CC) to USD2.65bn, tad above mid-point of its guidance and broadly in line with our estimate of USD2.64bn. Growth was aided by the Top-10 clients, which grew 7.4% QoQ, and it was across top, top 2-5, and top 6-10 clients. IT services margin expanded 40bps QoQ to 16.4%, ahead of our estimate of 16%, while overall margin for Q4 expanded 110bps QoQ to 15.9%, in line with our estimates, due to the ~Rs1bn of reconciling items impact. Among verticals, 5 of the 7 reported a sequential decline in CC terms. Consumer, ENU, Technology, Manufacturing, and Communications saw a decline of 0.6%, 0.3%, 6%, 0.6%, and 4.8%, respectively, while BFSI and Healthcare reported growth of 2.1% and 1.2%, respectively. Americas 2 was the only strategic market unit to post growth, up 1.9% QoQ CC, while Americas 1, Europe, and APMEA saw a decline of 1.8%, 0.1%, and 2.2%. TCV of orders stood at USD3.6bn, while large-deal TCV was USD1.2bn (18 large deals). Total headcount declined 2.6% QoQ/9.5% YoY to 234,054. Attrition was stable QoQ at 14.2%. What we liked: Margin resilience, recovery in Capco, Strong cash conversion (~119% OCF/ EBITDA). What we did not like: Sequential decline (in CC) in 3 out of 4 strategic units, and 5 out of 7 sectors.

Earnings Call KTAs

1) There are no material changes in the demand environment compared to the start of the year CY2024. The management’s immediate focus is to accelerate growth. The core tenets of the operating model will remain unchanged under the new CEO. Consulting-led, AI-infused offerings will be the key differentiator for the company. 2) Management suggested green shoots in consulting last quarter, which continued in Q4 as well, with Capco revenue growing 6.6%, and order clocking growth of 43.6% QoQ. 3) BFSI retuned to growth after 4 quarters of softness. Healthcare has continued to do well. ERU and manufacturing have been soft, though there is a good pipeline of interesting deals. Consumer and Lifesciences continue to be impacted by the spend environment owing to high inflation. 4) Large deal pipeline continues to be strong, and also consists of a few mega deals. 5) Management will remain selective on the M&A front, and will prefer tuck-in acquisitions. It acquired 60% stake in Aggne for a cash consideration of USD66mn in Q4 to strengthen its P&C core system implementation capabilities, specifically in the area of Duck Creek. 6) Utilization was at an all-time high in Q4, and the management hopes to sustain it. Headcount decline has been driven by operational efficiency.

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