Wipro fights its way back into the game

The enthusiasm among investors is understood, considering the earnings pain Wipro has been through due to increased weakness in its discretionary portfolio and company-specific challenges. This had kept the Wipro stock on a backfoot compared to peers lately.

Sequential constant currency (CC) revenue for IT Services in Q3 grew 0.1%, beating the consensus estimate of -0.5%. “Wipro Q3 performance was an inflection of sorts. Revenues topped, albeit marginally, the upper end of its guide (-2-0%), a first in over 12 quarters,” said JM Financial Institutional Securities report on 17 January. 

The healthcare and manufacturing verticals drove growth, while BFSI (banking, financial services and insurance) saw revenue decline mainly due to furloughs. The management said the near-term demand environment is gradually improving as there are some green shoots in discretionary technology spending. Wipro’s consulting businesses, Capco and Rizing, also did well.

Promising margin 

Another positive that has led to earnings upgrades for Wipro was the handsome operating margin beat. IT services Ebit margin at a 12-quarter high of 17.5%, up 70 basis points sequentially, ahead of the consensus estimate of 16.4%. Margin expanded despite wage hikes aided by improved execution in core and consulting businesses, conscious overhead reduction and focus on utilization, among other measures. Ebit is short for earnings before interest and taxes.

Management expects the margin to be around 17.5% in Q4. Cost optimization remains a key theme for Wipro, but the management expects significant growth in AI spending.

Going by Q3 beat, the scenario seems to be turning around for Wipro, even so, it has a lot of ground to cover amid some downside risks. Wipro’s sequential CC revenue growth guidance for Q4 of -1% to +1% was disappointing and reflects the pain in Europe and APMEA (Asia-Pacific, Middle East, and Africa) regions. In Q3, among geographies, the Americas was the only region that saw positive growth.

Problem areas

Though Wipro has seen a gradual recovery in its operational performance, weakness in select verticals and geographies would keep the top-line growth volatile. “Wipro has higher exposure to BFSI, consumer and E&U (energy and utilities) verticals in Europe. The company has been impacted by project roll-offs and share losses in a few accounts in Europe. Within APMEA, Wipro has been pruning margin-dilutive engagements, leading to some revenue decline,” said the Kotak Institutional Equities report on 18 January. 

Wipro is rebuilding the next level of leadership in APMEA to regain market share and expects some improvement in business momentum in the next few quarters.

Deal wins of $3.5 billion in Q3 were steady sequentially but declined 7% year-on-year. The total contract value (TCV) of large deals at $961 million was a four-quarter low and down 35% sequentially. Wipro signed 17 large deals in Q3. Akin to peers, the Wipro management also highlighted some momentum in the small and medium-sized deals. However, the composition of its deal pipeline remains largely unchanged and focused toward cost takeout deals.

While Wipro’s plans of campus recruitment of 10,000-12,000 freshers in FY26 also indicate growth acceleration, over a third of the portfolio remains stressed and that leakages in renewals still need to be plugged for Wipro to catch-up with peers on growth, said analysts at HDFC Securities.

Meanwhile, the Wipro stock is up 25% so far in FY25, beating the Nifty IT index’s 20% returns. The stock is trading at FY26 price-to-earnings multiple of around 22x, showed Bloomberg data, a discount to tier-1 competitors. For the valuation gap to narrow, new chief executive Srini Pallia has to deliver on sustained earnings growth.