Information technology major Wipro’s earnings for the first quarter ended June 30, 2024, will be marked by headwinds and potential growth areas, experts said.
The Bengaluru-headquartered firm will report its Q1 earnings on July 19.
The Street expects Wipro’s consulting business to recover as highlighted by Accenture’s management commentary last month. However, adverse macroeconomic impact and continued softness in retail and communication verticals will continue to drag the topline.
Analysts expect Wipro’s management to likely reflect a mix of cautious optimism and focus on key growth areas. They will await comments on performance in large deals, discretionary spending trends, demand environment, and advancements in artificial intelligence (AI).
As stakeholders and investors await the earnings report, here are the top five themes that might play out in Q1.
Revenue growth, margins
Wipro's revenue growth in Q1FY25 is expected to be largely flat, adversely impacted by the ongoing macroeconomic challenges and weakness in key verticals such as BFSI. Analysts from Kotak Institutional Equities forecast revenue to be above the midpoint of the company's guidance range of (-) 1.5 percent to 0.5 percent.
On the other hand, brokerage Motilal Oswal Financial Services anticipates a slight decline of about 0.5 percent in Q1. “We expect continued softness in key verticals such as retail and communications led by cautious client spending behaviour,” the brokerage said in a pre-earnings research note.
Margins are anticipated to show improvements on a year-on-year basis, supported by ongoing cost containment and efficiency measures. Kotak forecasts a 30 basis points (bps) increase in EBIT margins quarter on quarter (QoQ), as a result of these efficiency initiatives.
However, not all analysts are optimistic about margin expansion. Brokerage Motilal Oswal expects IT services margins to remain range-bound with a potential marginal drop.
FY25 guidance
Brokerages have mixed expectations regarding Wipro's FY25 guidance. While Kotak Institutional Equities and Emkay Global anticipate the company to provide revenue growth guidance in the range of (-) 1 percent to 1 percent, Nomura expects Wipro to guide 0-2 percent revenue growth in Q2FY25.
Analysts say this guidance would reflect a slight uptick from the last quarter, suggesting some confidence in the company's ability to navigate through the prevailing uncertainties.
Growth will largely be driven by the strength in the consulting business, through subsidiary Capco, and a gradual recovery in the Americas market, brokerages Kotak and ICICI Securities said in their reports.
ICICI Securities and JM Financial said they are keen on hearing about Wipro's AI initiatives and how these could drive future growth.
Discretionary spending
The outlook on discretionary spending remains cautious, as rivals Tata Consultancy Services (TCS) and HCL Technologies highlighted earlier. Wipro’s consulting business contributes a significant portion to its revenue and all eyes will be on whether the green shoots seen earlier have translated into revenue.
“Although we think Capco could benefit from a cyclical recovery in discretionary spending by BFSI clients, we are concerned about the underwhelming track record of the rest of the business even in an upcycle,” brokerage BNP Paribas said in a note.
Wipro might be vulnerable in cost takeout and vendor consolidation deals when compared to its larger peers.
Analysts would watch out for a change in the composition of the deal pipeline in terms of cost take-outs as against discretionary spending, gauging the company's ability to retain and capture wallet share, brokerage Emkay Global said.
Also read: Discretionary spending has not picked up, says HCLTech
New CEO's turnaround plan
Since the new CEO Srinivas Pallia took charge, recent developments have caught the attention of the Street such as top-level resignations from the former Capgemini employees, a surge in deal wins, and the five focus areas of the new CEO.
Two heavyweights -Wipro’s Chief Operating Officer Amit Choudhary and Asia Pacific, India, Middle East and Africa (APMEA) president Anis Chenchah- resigned in Q1.
They exited after former Chief Executive Officer Thierry Delaporte resigned on April 6.
Interestingly, Choudhary, Chenchah, and Delaporte have all worked in the France-headquartered Capgemini.
Both Chencha and Choudhary joined Wipro when Delaporte was the CEO of Wipro. Analysts see this as Pallia’s strategic decision to replace certain top-level functionaries to fuel growth.
Another development in the form of strong deal signings is being seen as a positive, after multiple quarters of disappointment. Wipro announced its first mega-deal win since 2021 in the communications vertical.
As per ICICI Securities, Wipro has won nine notable deals in the quarter, while larger rivals TCS, Infosys, and HCLTech won 3, 12, and 3, respectively. “We expect Wipro to report healthy deal TCV (Total Contract Value), led by Nokia and $500 million Telecom sector deal,” JM Financial said in a research note.
The Street would also await to hear from the management on the efficacy of the five key focus areas that Pallia outlined in April.
Gen AI picture
The focus would also be on how the company has fared in Generative AI (Gen AI) deals.
In April, Pallia had included AI in two of the organisation’s five goals to turn around the company’s dwindling fortunes.
Pallia had said he would focus on industry-specific offerings and business solutions, mainly on consulting businesses, which can be infused with AI. Additionally, Wipro will continue to build AI-ready talent at scale, which will be trained to deliver industry-specific business solutions.
“What's important is how we build on these five priorities as are necessary to accommodate technological shifts and of course market condition,” Pallia had said.
On Wipro’s multiple AI initiatives, brokerages suggest potential positive traction from these efforts.
On July 11, TCS said it has $1.5 billion worth of AI and Gen AI projects in the pipeline as of Q1, closing in with rival Accenture’s $2 billion in cumulative Gen AI revenue.
A day later, peer HCLTech said it has over 200 Proof of Concepts (PoC) for Gen AI, however, refusing to call out any bookings or revenue numbers on Gen AI deals.
Also read: Hiring, interviewing, experience zones: How TCS is infusing AI into its operations
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