IT services major Wipro is at a crossroads once again– new CEO, new expectations, new hopes. However, Nuvama Institutional Equities said, there are two big differences this time: 1) its portfolio with higher exposure to discretionary spends is favourably placed to ride the macro recovery; and 2) the CEO this time is an internal lifer, looking to take the old guard along on the path of achieving growth on a par with peers. The current combination of a favourable portfolio, new CEO and inexpensive valuations, the report added, make for an attractive risk-reward profile. “We maintain our estimates and raise (and roll forward) target valuation to 25x FY27E PE (from 20x Sep-26 PE) on sharper growth recovery,” it added.
A favourable portfolio mix
Wipro, along with companies such as Infosys, LTIMindtree, and Mphasis, has relatively high exposure to discretionary spends, which is around 60-65 per cent of revenue. Wipro had to bear the brunt of cut or hold on discretionary spends over the last few quarters, which led to a decline in top line in FY24. However, per the report, what once was its bane could now become the boon. Following the interest rate cut by the Fed in Sep-24 and improving macro dynamics in the US, discretionary spends is expected to revive, thereby benefitting Wipro.
Besides discretionary spends, Wipro’s portfolio has segments that should see a strong recovery in coming quarters. According to the Nuvama report, the IT major’s consulting arm (primarily Capco) has been growing for the last two quarters. Accenture’s recent commentary and guidance for growth in Consulting in FY25 too validates a recovery in the Consulting business. “We expect the Capco business to lead Wipro’s growth recovery over the next few quarters. Capco is at the intersection of BFSI and consulting business—both segments are showing signs of recovery as per commentaries from multiple management and consultants,” the report said.
Wipro also has higher exposure to BFSI (around 34 per cent of revenue), which has been hurt by cut in tech spends by financial institutions globally. Now with the recovery in BFSI, basis commentary of peers such as Accenture, TCS and Infosys, and those of large US banks (JP Morgan, Citi) on incremental tech spends, Wipro stands to benefit more than peers. While the BFSI segment appeared to have bottomed out for Wipro with YoY growth rate falling to -11 per cent in Q3FY24 but has since then shown signs for recovery. “We anticipate the vertical to start reporting positive growth over the next few quarters – driven by industry tailwinds and bottoming out of key accounts in the segment,” Nuvama said.
A possible turnaround strategy under the new CEO
Wipro, in April 2024, appointed Srinivas Pallia as its new CEO, choosing an internal candidate after 14 years of experiments with external ones. From bolstering the company’s India leadership to prioritising operating margins, Srinivas Pallia has embarked on a series of changes to make Wipro’s turnaround possible. Srinivas Pallia took over from Thierry Delaporte, who decided to leave the company a year ahead of his term, which was supposed to end in mid-2025. “Our channel checks suggest Mr Pallia appears to have ushered in a new era of positivity in Wipro. Having been in the “system” for 32 years, Mr Pallia knows how to work carrying along the organisation and scores of senior employees. He has promoted many internal candidates to roles filled by Mr Delaporte by external ones. He has reinvigorated the workforce into believing in themselves and working towards two common goals: i) margin retention above 16 per cent; and ii) level up to industry growth quickly. We believe the last throw of the dice by the Wipro board (an internal CEO) might just work,” maintained the Nuvama report.
Nuvama said that the previous CEO Thierry Delaporte, during his tenure, hired multiple people of foreign origin in leadership positions. While, the report added, he was trying to build a global workforce, which clients would be more receptive to – it also led to sidelining of the existing internal workforce that aspired for leadership positions. “This, we believe, would have led to unavoidable friction between various levels of leadership – leading to failure in achieving desired results. The same also led to many of those people, hired by Thierry, leaving prematurely,” it said, while maintaining that Wipro, being a company with deep roots, has a style of working, a work culture deeply embedded into its workforce. It added that the IT major is also a company with high employee loyalty, with scores of employees having been with the company for over two decades and “putting this kind of seasoned loyal workforce, under an external CEO, is always a risky proposition”
Margins to expand
Wipro’s EBIT margins (IT services business) present a very stable picture, holding up in a narrow band of 16-16.5 per cent over the last eight quarters. Going forward too, management remains committed to maintaining EBIT margins above 16 per cent—even with wage hike and seasonality impacts in any quarter. In fact, Nuvama said, the company now appears to be getting closer to its aspirational band of 17-17.5 per cent EBIT margin, which could lead to healthy earnings growth over the next two years.
“Given the headcount addition turning positive for the first time after six quarters, and utilisation peaking out, we reckon Wipro shall add headcount in coming quarters—which might prove to be a margin headwind, even if the company reports strong growth. But at the same time, operational efficiencies should be able to mitigate (partly) any margin headwinds,” it stated.
Superior FCF and capital allocation profile
Among all its large-cap peers, Wipro’s conversion of net income to free cash flow (FCF to net income) has been one of the highest. This coupled with its inexpensive valuations make its FCF yield one of the highest in the industry.
During the Q2FY25 earnings call, Wipro management had announced that they would revisit the capital allocation policy in Q3FY25 results. “We note that Wipro management has laid out its capital allocation policy—intending to return 45–50 per cent of PAT to shareholders, through dividend and buybacks, over a three-year period. Over the last three years (FY22-24), Wipro has returned 48 per cent of its PAT to shareholders. We expect Wipro to raise its shareholder payout—closer to the payouts by TCS, Infosys and HCL Tech,” Nuvama said while maintaining that while Wipro has gone slow on M&A activity over the last three years, the incumbent CEO should maintain the restraint on M&A front, thereby freeing up incremental capital that could be paid out to shareholders.