Wipro Q2 Results Preview: After TCS & HCL Tech, will this IT major exceed expectations?

Wipro is expected to report muted earnings growth for the September quarter, with investors likely to focus more on its December-quarter guidance, deal ramp-ups and AI-led pressure on revenue than on the headline YoY numbers. The IT services major is expected to post about 9% year-on-year (YoY) revenue growth and 2% YoY profit growth, according to the average estimates of seven brokerages.

The modest profit growth, despite high single-digit revenue expansion, reflects continuing pressure from weak discretionary spending, pricing stress, acquisition-related costs and investments in AI-led services and platforms.

Sequentially, analysts expect Wipro's IT services revenue to decline, staying closer to the lower end of the company’s guidance band. For Q2, Wipro had guided for constant-currency revenue growth in the range of minus 1.5% to plus 0.5% quarter-on-quarter.

IT revenue may decline

Brokerages broadly expect Wipro’s IT services revenue to fall between 0.5% and 1.4% sequentially in constant currency terms, even after factoring in inorganic contribution from acquisitions such as Mindsprint and AlphaNet.

Emkay expects a 1% sequential decline in dollar revenue in the IT services segment, including contribution from Mindsprint and AlphaNet and after factoring in about 10 basis points of cross-currency headwinds. Jefferies expects IT services revenue to decline 1.4% quarter-on-quarter in constant currency, closer to the lower end of Wipro’s guided range, including about 50 basis points of inorganic contribution from Mindsprint.

JM Financial expects Wipro to report a 0.5% sequential decline in constant currency revenue, with a 10-basis-point cross-currency impact translating into a 0.6% decline in dollar revenue. It expects acquisitions to contribute about 80 basis points in the quarter, with Mindsprint and AlphaNet contributing about 40 basis points each.

Kotak’s view is more cautious on the underlying business. It expects revenue to decline 1% sequentially, including about 80 basis points from the AlphaNet acquisition and full-quarter consolidation of Mindsprint. On an organic basis, Kotak expects a sharper revenue decline of 1.8%, citing weak macro conditions, pricing pressure and share loss.

Motilal Oswal expects IT services revenue to decline about 0.5% quarter-on-quarter in constant currency, including about 70 basis points of inorganic contribution from Mindsprint. Nuvama expects IT services revenue to fall 1% sequentially in both constant currency and dollar terms, including around 80 basis points of inorganic contribution.

Margins may improve

Margins are expected to improve sequentially, helped by operating efficiencies, currency benefits and the reversal of wage-hike impact. However, analysts do not see a strong margin rebound because Wipro continues to invest in AI-native business, platforms and large deal transitions.

Emkay expects IT services EBIT margin to improve by 50 basis points sequentially, while overall EBIT margin is likely to improve by 40 basis points. Jefferies expects EBIT margins to rise by 25 basis points quarter-on-quarter. JM Financial expects gradual margin improvement as wage hikes are behind, though investments in business and acquisitions may partly offset the gains.

Motilal Oswal sees margins to expand by about 40 basis points sequentially to 16.4%, helped by reversal of wage-hike impact. Nuvama expects a smaller 20-basis-point margin expansion. Kotak expects margins to remain broadly stable sequentially, but sees a YoY decline because of weak growth and upfront costs in lower-margin deals.

Q3 guidance is a watch

The Street’s biggest focus will be Wipro’s guidance for the December quarter, which is usually seasonally weak due to furloughs. Most brokerages expect weak guidance for Q3.

Emkay expects Wipro to guide for minus 2% to 0% revenue growth for the third quarter. Kotak and Nuvama also expect the company to guide for minus 2% to 0% quarter-on-quarter constant-currency growth, citing seasonality, higher furloughs, weak discretionary spending and AI-led deflation.

Jefferies sees Wipro’s organic revenue growth guidance for Q3 to be in the range of minus 1.5% to plus 0.5%, as mega deals ramp up. JM Financial also expects Q3 constant-currency guidance at minus 1.5% to plus 0.5%.

Analysts said management commentary on deal intake, deal ramp-ups and deal conversion will be closely watched. Wipro has been trying to strengthen its participation in vendor consolidation, cost takeout and transformation deals, but the external demand environment remains weak.

Disclosure: This article has been written by Podishetti Akash, who is not a SEBI-registered Research Analyst or an Investment Adviser. Podishetti Akash and his ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclosures here.