Wipro Q2FY23 review –LTM attrition moderating; consulting slowdown a concern

What’s Buzzing 

The company has guided for 0.5-2% QoQ CC revenue growth in Q3FY23. EBIT margins improved QoQ albeit minor despite wage hike in the quarter. 

Context 

IT services revenues increased 4.1% QoQ in CC (organic growth of 2.9% QoQ,120 bps contribution from Rizing). Dollar revenues were up 2.3% QoQ to US$2,797.7 mn due to 180 bps cross currency headwinds. Rupee revenues were up 5.1% QoQ to Rs 22,363 crore. Vertical wise the CC growth was aided by BFSI, Consumer, Energy which were up 3.6%, 5.5%, 6.6% QoQ, respectively. Geography wise, CC growth was aided by both Europe, America, which reported growth of 5.6%, ~3% QoQ, respectively. IT services margins were up 10 bps to 15.1% despite wage hike due to better pricing and operating efficiency. Attrition was down 30 bps QoQ 23.0% (down 80 bps from peak in Q4FY22). The company had 11 large wins in the quarter and large deal order book was strong at US$725 mn. Wipro is guiding for US$2,811 mn to US$2,853 mn revenue in Q3FY23 i.e. 0.5-2% QoQ growth. The company hired 14,000 freshers in H1. 

Our Perspective 

The company is not seeing any slowdown in tech spends from clients while it has a cautiously optimistic stand on the Europe market due to current geopolitical risks and energy constraints, which is baked in its Q3 guidance along with normal furloughs. Strong growth in order book is expected to provide near term revenue visibility. Key positive during the quarter was moderation of attrition for the second consecutive quarter, which is divergence trend vs. TCS. We believe this along with better pricing and moderation of subcontractor cots (12.9% of sales now vs. peak of 13.9%) is expected to have a positive rub-off on margins ahead. However, net addition of only 605 employees in Q2 vs. strong numbers in earlier quarters could be a reflection of some slowdown in Capco business and layoffs done by the company in the Europe business. Wipro acquired a consulting business in the BFSI space named Capco a couple of years back. It provided strong growth momentum. As per the company, Capco business growth is moderating. Hence, we believe it is expected to hit financials materially in FY24. We estimate 8.3%, 5.9%, 6.2% CAGR in revenue, EBITDA, PAT, respectively, in FY22-25E.