Wipro

Wipro's fiscal first-quarter constant-currency revenue growth of 1% year over year was at the midpoint of the guided range. Operating margin of 16% was flat with a year ago, as rupee depreciation benefits offset salary increases and continued investment in artificial intelligence.

Why it matters: We are generally satisfied with Wipro's pace of ramping up large deals that support stable top-line growth in line with peers. However, quarterly new bookings of $3.4 billion appeared soft, undershooting the $5 billion in bookings that Wipro secured a year ago. Like other IT consultants, Wipro is facing a tough enterprise IT spending environment with longer decision cycles. While we believe AI-led demand is a net positive for the IT services market over the long term, subscale players like Wipro can face more intense near-term competition.

The bottom line: We trim our fair value estimate for no-moat Wipro to INR 160/$1.65 per share from INR 170/$1.80 to reflect a less favorable competitive position as early AI adopters move away from traditional business process outsourcing. The shares currently look slightly overvalued. The AI component across major deals Wipro closed recently undershot our expectations. As clients consider rolling out novel AI-native digital experiences across the organization, larger IT consultants with deeper pockets of agentic AI products should have an advantage over Wipro. We still believe management's operating margin goal of 17%-17.5% is reasonable, given Wipro's large-deal ramp-up and workforce optimization opportunities. We forecast a moderate pace of continuous margin improvement, with operating margin going back to 17% by fiscal 2028.

Coming up: For the second quarter, management expects sequential revenue growth of negative 1.5% to positive 0.5% in constant currency, consistent with the revenue growth trend we have seen lately. Management also forecasts stronger bookings as it closes incremental deals that were delayed.

Our fair value estimate is $1.65 per share, which implies an adjusted price/earnings ratio of 12 times and an enterprise value/adjusted EBITDA ratio of 9 times. We model a 5% cumulative annual growth rate for Wipro over the next five years, primarily driven by enterprises’ secular IT upgrade demand.

Our forecast for Wipro’s organic revenue growth is near the lower end of Morningstar’s IT services coverage on a constant-currency basis because Wipro's service portfolio is more limited compared with other major Indian IT consultants. Incremental spending from the biggest customers should be the main source of Wipro’s near-term top-line growth because the company has already formed strategic relationships that embody strong switching costs with its top clients. Newer and smaller customers may find Wipro’s BPO-oriented service offerings less attractive in the era of agentic AI, which could lead to limited room for future growth, in our view. We expect revenue contribution from Wipro’s biggest customers to continue to go up as a percentage of revenue.

Another reason that results in Wipro’s valuation discount compared with other Indian IT services firms is its outsize exposure to lower-margin BPO services. We do not expect the valuation gap to close anytime soon, as Wipro needs time to build its presence in higher-end service segments such as system integration and consulting. We do not foresee material changes in Wipro’s labor force dynamics. Employee voluntary attrition should remain in the low to midteens, and consultant net utilization should stabilize between 83% and 85% over the long term.

We see a steady march up of Wipro’s operating margins since fiscal 2023, with margins in fiscal 2025 supernormally high due to outperformance in North America. AI-led efficiency gains and the Indian rupee's weakness should enable Wipro to record consistent margin improvement over the next five years. Despite the growth of Wipro’s system integration and application management services, commoditization for its business process outsourcing unit means that its margins are unlikely to catch up with peers'.

We don't believe that Wipro has an economic moat. As one of the world’s major IT services providers, Wipro has a history of delivering desired business outcomes by leveraging offshore labor, which has led to strong client relationships in sectors such as financial services. More recently, generative AI started to show its potential to disrupt knowledge-based work, including IT services. We already see purely AI-based commercial products that can handle customer support workflows, which overlaps with Wipro’s core business process outsourcing business. Therefore, we are not confident that Wipro can keep returns on invested capital above its cost of capital over the next decade. This prevents us from assigning Wipro a Narrow Morningstar Economic Moat Rating.

Wipro has a history of securing 10-year-long business process outsourcing contracts with major customers. BPO services often include insurance claims processing or human resources administration. Many enterprises are looking to outsource these functions for lower costs and better labor flexibility. Typically, the length of a service contract is based on the complexity and scale of the BPO arrangement, which means larger, more complex projects usually lead to longer, more strategic relationships. Given that many BPO contracts between Wipro and its major customers are longer than the standard contract duration of five years, we believe customers trust Wipro to work as a reliable partner that helps them achieve long-term business goals.

Many BPO arrangements are highly customized based on customer needs, which means that switching to another service provider can be challenging. During the new vendor’s ramp-up process, unfamiliarity with existing business processes and information systems can lead to service disruptions and cost overruns. Since every customer has unique business situations, and corporate workflows are often deterministic, a new contractor would still need to ramp up even with the help of AI. Overall, enterprise customers that value performance stability often choose to stay with their incumbent IT services provider and renew their BPO contracts, as long as the vendor’s performance has met their expectations. If Wipro can show that customers will stick to its services instead of switching to AI-native alternatives, we think the company can eventually develop an economic moat based on switching costs.

Wipro is able to establish long-term relationships with clients, highlighted by its healthy book/bill ratio. A ratio of above 1 means that the total size of bookings is larger than shipments, which indicates positive client dynamics. Wipro’s book/bill ratio has sat nicely above 1.3 since fiscal 2024. Not all new bookings will be converted into revenue, and the timing of bookings getting converted to revenue is also uncertain. However, this healthy book/bill ratio gives us confidence that customers are willing to expand their business relationships with Wipro, which may eventually lead to higher switching costs.

We see some signs of intangible assets and cost advantage for Wipro, but we do not think these two moat sources are strong enough to support an economic moat on a stand-alone basis at the moment. Wipro has made some progress with its system integration business by establishing a partner ecosystem with hyperscalers, cybersecurity companies, and enterprise software vendors. However, as a smaller company, Wipro has worked on fewer business cases than its larger counterparts, Tata Consultancy and Accenture. We surmise that Wipro’s library of digital solutions needs more blueprints before it can establish a competitive advantage based on intangible assets.

Although India-based Wipro relies heavily on offshore labor for salary arbitrage, its unit economics are not as competitive as its peers'. Over the past 20 years, Wipro’s operating margin has been at least 500 basis points lower than that of Infosys or TCS. We believe Wipro’s offshore tech talent pool has not yet reached a scale that offers a cost advantage-based economic moat comparable to India-based rivals.

Wipro’s expansion in system integration and custom application development can help the company capture the tailwind of increasing enterprise AI demand.

Wipro’s focus on serving its top customers can lead to more robust customer relationships that facilitate higher incremental spending.

Automated tech solutions integrated into existing business processes should decrease the variable costs associated with each incremental sale for Wipro.

Continued geopolitical uncertainty and economic volatility could influence enterprise IT spending and weigh on Wipro’s performance.

Wipro’s margins could face pressure as a result of continuous wage hikes in India and higher hurdles to move tech talent on a global scale for on-site work.

Expansion of AI-based system integration services could cannibalize Wipro’s BPO business as AI agents replace consultants to handle certain workflows.