Wipro Ltd

NSE:WIPRO

Earnings Call Analysis

Wipro's Q2 FY25: Steady Growth Amid Challenges

In Q2 FY25, Wipro's IT Services revenue reached $2.66 billion, a sequential growth of 0.6%, aligning with guidance expectations. Operating margins improved to 16.8%, up 35 basis points. Total bookings rose 8.4% to $3.6 billion, driven by success in BFSI and consulting services. However, guidance for Q3 indicates a decline of 2% to flat revenue due to seasonal furloughs and specific client challenges in Europe. Amidst this, Wipro is strengthening its AI capabilities, underscoring long-term growth potential while looking to stabilize and grow its lagging manufacturing and energy sectors.

Navigating Economic Uncertainties with Steady Growth

In the second quarter of fiscal year 2025, Wipro reported IT Services revenue of $2.66 billion, reflecting a modest sequential growth of 0.6%. This performance aligns closely with Wipro's guidance, indicating that the company is managing uncertainties in the current economic climate effectively. Importantly, operating margins also expanded to 16.8%, which is an increase of 35 basis points from the previous quarter and 71 basis points year-on-year. This margin growth reflects operational improvements despite the ongoing wage increases introduced in September.

Strong Bookings and Sector Performance

Wipro's total bookings for the quarter were impressive at $3.6 billion, marking an 8.4% increase quarter-on-quarter. Particularly noteworthy was the performance of the Capco business unit, which saw a growth of 3.2% sequentially and 6.9% year-on-year. Wipro's strategy appears to be working well, especially in the BFSI sector (Banking, Financial Services, and Insurance), which achieved a robust 2.7% sequential growth driven by new and existing client relationships. However, performance was mixed across other sectors, with manufacturing declining by 2% and Energy & Utilities down 3.7%.

Challenges Ahead: Guidance and Expectations

Looking ahead to the next quarter, Wipro anticipates headwinds due to seasonal furloughs and lower working days, expecting a sequential revenue decline between -2% to 0% in constant currency terms. The Q3 guidance reflects some specific client-related challenges in Europe that have impacted performance. Nevertheless, the company remains optimistic about its deal pipeline, especially in the Americas and Asia-Pacific, with expectations for a rebound in Q4 as those furloughs pass and deal conversions take effect.

Strategic Focus: Large Deals and AI Integration

Wipro has placed a strong emphasis on large deal acquisitions, securing 19 deals this quarter with a Total Contract Value (TCV) of $1.489 billion—a remarkable increase of 29% sequentially and 16.8% year-on-year. The company is also aggressively investing in AI talent, with over 44,000 employees trained and certified in advanced AI tools. This dual focus on large deals and AI capabilities is seen as critical for driving future growth and operational efficiency.

Financial Position and Future Outlook

Wipro's financial stability is evident with robust cash flows, achieving operating cash flows of $510 million in Q2—132% of net income—bringing total cash reserves to $6.2 billion. This strong cash position allows flexibility in capital allocation going forward, including the prospective proposal for a 1:1 bonus share issue to shareholders. The management's commitment to maintaining margins within a target band of 17% to 17.5% reflects a disciplined approach to growth, despite recent challenges.

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Wipro Limited Q2 FY '25 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Dipak Bohra, Senior Vice President, Corporate Treasurer and Investor Relations. Thank you, and over to you, sir.

[Dipak Bohra, executive]

Yes. Thank you, Yashashree. A warm welcome to our quarter 2 financial year '25 earnings call. We'll begin the call with the business highlights and overview by Srinivas Pallia, our Chief Executive Officer and Managing Director, followed by updates on financial overview by our CFO, Aparna Iyer. We also have our CHRO, Saurabh Govil, on this call. Afterwards, the operator will open the bridge for Q&A with our management team.

Before Srini starts, let me draw your attention to the fact that during this call, we may make certain forward-looking statements within the meaning of Private Securities Litigation Reform Act 1995. These statements are based on management's current expectations and are associated with uncertainties and risks, which may cause the actual results to differ materially from those expected. The uncertainties and risk factors are explained in our detailed filings with SEC. Wipro does not undertake any obligation to update the forward-looking statements to reflect events and circumstances after the date of filing. The conference call will be archived, and a transcript will be available on our website.

With that, I would like to turn over the call to Srini. Thank you.

[Srinivas Pallia, executive]

Thanks, Dipak. Hello, everyone. Thank you for joining me and my leadership team for our second quarter results for the financial year 2024-'25.

In Q2, we met our expectations for revenue, bookings and margins. The long-term potential of our business is strong, and we are prepared to handle the current economic uncertainties. We continue to focus on our 5 strategic priorities and building a strong talent pool to capture AI opportunities.

Now let me go over the financial highlights for the quarter and share some specific insights on our markets and industry sectors. All the revenue growth numbers I share will be in constant currency. Our IT Services revenue for quarter 2 was $2.66 billion reflecting a sequential growth of 0.6%. This brings us closer to the upper end of our guidance. Operating margins came in at 16.8%, which is an expansion 35 basis points quarter-on-quarter and 71 basis points year-on-year.

In terms of total bookings, we ended the quarter at $3.6 billion, which is an 8.4% increase quarter-on-quarter. Our Capco business continued to see traction and grew 3.2% quarter-on-quarter and 6.9% year-on-year. Coming to our strategic market unit performances. We saw sequential growth in 3 of the 4 markets in quarter 2. Americas 1 achieved sequential growth of 1.2%, driven by good performance in Healthcare, Technology and Communication sectors. Americas 2 also recorded sequential growth of 0.8%, supported by robust demand and strong execution in BFSI sector. APMEA grew by 0.3%, driven by traction in Capco. We are seeing early signs of our business stabilizing in this region. Europe registered a sequential decline of 0.1% due to overall weak demand and client-specific issues in few accounts.

Among industry sectors, we experienced varied performance. With strong account mining and traction in Capco business, BFSI continued to accelerate, delivering 2.7% sequential growth. This growth was led by Americas. Additionally, we are seeing momentum in both APMEA and Europe. This marks the third consecutive quarter of growth in BFSI.

Technology and Communications grew by 1.6% sequentially, driven by the ramp-up of a recent large deal and momentum in existing relationships. However, manufacturing remained soft for us with a sequential decline of 2%. We are seeing good progress with our consulting-led industry solutions in the automotive manufacturing segment. In addition, there are also signs of uptick in demand in the industrial segment. We will focus on converting this into wins to revive growth in manufacturing.

Energy & Utilities also remained weak with a sequential decline of 3.7%. However, we see opportunities for vendor consolidation and cost takeout, particularly in the energy sector. As you may remember from the last 2 quarters, we identified 5 strategic priority areas of growth. We have advanced in all 5 areas, and I would like to take this opportunity to share some indicators of our progress in quarter 2. One, we stayed focused on growing our large accounts in our 4 profitable markets and 6 priority sectors, and we will continue to invest in them for expansion and growth. In quarter 2, our top account grew 4% sequentially, top 5 accounts grew 6.2% sequentially and top 10 accounts grew 3.7% sequentially, reflecting our focus on expanding our footprint and scaling our large accounts. Of course, large deals are crucial for our growth. During the quarter, we booked 19 large deals with a TCV of $1,489 million. This translates to a growth of 29% sequentially and 16.8% on a year-on-year basis. It is encouraging to see the diversity in our large wins across sectors. The deals we won cover a variety of themes from cost reduction and vendor consolidation, to application modernization and cloud operations. In fact, we are leading these deals with industry and cross-industry solutions, which are consulting-led and AI-powered.

Let me briefly talk about the 2 largest deals we won in quarter 2. A leading transportation and logistics company has selected Wipro to drive a business-critical SAP S/4HANA transformation program. This win involved collaboration within all our consulting arms, Rizing, Designit and Capco. It also highlights our industry knowledge and ability to deliver customized solutions to clients. The second example, a software technology company has selected us to support its product development and IT operations end-to-end. This is a total outsourcing deal where Wipro will consolidate vendors and take over engineering, application, infrastructure and operations for the client. Additionally, we will implement GenAI powered solutions to solve business challenges and deliver operational efficiency. It's important to highlight that one of these deals involves a new client, while the other marks our transition from having a minimal presence to becoming a strategic partner.

Let me now talk about another strategic priority, which is building talent at scale. We believe all our employees should adopt an AI mindset, have the right skill set and use the right tool set in their work for our clients. In previous quarters, I have discussed our investments in reskilling our workforce for AI opportunities. We have now trained and certified over 44,000 employees on advanced AI. And we have a significant number of employees actively using AI developer tools across the company. In addition, we are developing talent closely aligned with our clients' business needs. For this, we have established account-specific academies to upskill employees, providing a clear road map for building capabilities relevant to both the industry and the technology context.

Before I share our guidance for the next quarter, I want to thank all my colleagues for their amazing support. As an organization, we grow by actively listening to feedback. In August, we conducted our annual employee engagement survey, and in addition, I have made it a priority to connect with employees wherever I go. We have taken specific actions based on their feedback. As you are aware, we implemented merit salary increase effective September 1, just 9 months after the last cycle, demonstrating our ongoing commitment to our employees.

Last month, we hosted a leadership summit where our top 300 leaders from across the globe gathered right here in Bangalore to reflect on our business and chart our future direction. It was encouraging to see that we have come together as Team Wipro, and there's a strong commitment to driving client success. I hope to harness this momentum and continue moving forward together.

Now on to guidance. Our Q3 revenue is expected to be affected by seasonal furloughs and fewer working days in this quarter. As a result, we are guiding for a sequential revenue growth of minus 2% to 0% in constant currency. Despite softness in revenue in quarter 3, we are confident of maintaining our margin in a narrow band.

With that, let me turn it over to Aparna for a detailed overview of our financials. Thank you. Aparna, over to you.

[Aparna Iyer, executive]

Thank you, Srini. Good evening, ladies and gentlemen. I'll share a quick update, after which we will open up for Q&A.

On the IT services revenue for Q2, we delivered a sequential growth of 1.3% quarter-on-quarter in reported currency and a growth of 0.6% in constant currency. This is closer to the upper end of our guidance range that we had laid out last quarter. We are pleased to share that our operating margin for the quarter was at 16.8%, an expansion of 35 basis points quarter-on-quarter and 71 basis points year-on-year. This brings us one step closer to our earlier conveyed target band of 17% to 17.5%. This expansion in margins was achieved on the back of operational improvements and after absorbing 1 month of salary increments that we had rolled out for our associates effective 1st September. We begin Q3 with headwinds of furlough and incremental impact of salary increases, yet we remain confident of staying in a narrow band of margins.

Our net income grew 21.3% year-on-year. This was on the back of higher operating profits, which grew at 11.4% year-on-year. Our EPS was at INR 6.14, which grew 6.8% sequentially. Quarter 2 was yet another quarter of strong cash flows. Our operating cash flows of $510 million in Q2 is at 132% of our net income. With this, we have cumulatively for H1 generated nearly $1 billion in operating cash flows. At the end of Q2, our investments and cash balances on our balance sheet now stand at $6.2 billion.

In other key metrics, our other income, net of the finance expenses, grew 34.2% sequentially. Our accounting yields for the average investments held in India was at 7.9%, ETR is at 24.6% in Q2. Our hedges continue to be in line with our policy. We had about $2.8 billion of ForEx derivative contracts as hedges at the end of Q2.

Finally, before I move to guidance, I'd like to share that in our recently concluded Board meeting, the Board of Directors have recommended issue of bonus shares to our shareholders in the ratio of 1:1, subject to the approval of shareholders. Additionally, we are working through our revised capital allocation in line with our strategy. And hopefully, we'll be able to share the details of that after our January Board meeting. In terms of our guidance, to reiterate what was stated by Srini, we expect the revenues from our IT Services business segment to be in the range of $2.607 billion to $2.660 billion. This translates to a sequential guidance of minus 2% to 0% in constant currency terms.

With that, we can open up for questions.

Operator?

[Operator]

[Operator Instructions] We'll take our first question from the line of Abhishek Kumar from JM Financial.

[Abhishek Kumar, analyst]

Congratulations on very good deal wins. My first question is on the guidance. Is this just the furloughs? Or are we also seeing flow-through of some of the client-specific challenges that you mentioned, which kind of is informing slightly mutish guidance for next quarter?

[Srinivas Pallia, executive]

Abhishek. As far as quarter 3 guidance is concerned, clearly furloughs, like Aparna called out as one and also the number of working days obviously is much lower. We also have some slowdown in Europe, thanks to client-specific reasons. Having said that, we see good momentum in our deal pipeline across Americas 1 and Americas 2 and also APMEA. We do have good pipeline in Europe, too. The focus for us is to actually win some of those and maximize our deal bookings for this quarter.

[Abhishek Kumar, analyst]

Okay. Next question is on Energy & Utility. You had mentioned last quarter also, there are certain client-specific challenges here. Are these now behind us? Or are they still there in front of us? How should we think about E&U as a continuous headwind to our overall growth?

[Aparna Iyer, executive]

So we -- like Srini shared in his speech as well, it is work in progress. There is a good pipeline. There is a demand across vendor consolidation, cost takeout and there are very, very good deals in the pipeline. We have to focus on conversion for us to improve our overall performance in E&U. And that's all that we have to say. It's all down to execution.

[Srinivas Pallia, executive]

Just to add a little bit more color to what Aparna said, Abhishek. Specifically in the energy sector, we are seeing opportunities around cost optimization and vendor consolidation as well, which is good news.

[Abhishek Kumar, analyst]

Okay. Maybe, just what I wanted to understand here is, are there any ramp downs that are continuing in a few clients that is impacting us. And if that's so, when do we expect those ramp downs to be behind us.

[Aparna Iyer, executive]

Yes. Our guidance for quarter 3 has several puts and takes. It has furloughs. It does have fewer working days. It also factors in a certain impact of certain client-specific challenges that we've alluded to in Europe. All of this is factored into the guidance as we start Q3. And given the momentum that we are building up, if you would see that our performance across market units and sectors, it has improved, and it is becoming a little bit more secular than what it was maybe 3 or 4 quarters back. So we are hopeful that we will build on that momentum once we are behind the seasonality of Q3.

[Operator]

We have a next question from the line of Nitin Padmanabhan from Investec.

[Nitin Padmanabhan, analyst]

Aparna, I wanted your thoughts on the drivers that are helping margins, the initiatives that are sort of offsetting the wage increase impact and the revenue headwinds that you're seeing?

[Aparna Iyer, executive]

So we have a set of traditional levers that have been at play. We have been improving our utilization consistently over the last few quarters. I do think the levels at which we are, we have to continue to sustain that. In Q2, we have dipped our utilization slightly, but we are well above the benchmark that we would like to be at.

Secondly, offshoring is also a lever that we have flexed. Going forward, what are the levers that we will use. There are the traditional set of levers, fixed price projects, pyramid improvements. The other lever that's very topical to us is around G&A optimization. We've spoken about that. We have done some work on it over the last few quarters. Some of it is paying off as we get into Q3. Also some of the acquired entities, as they are getting integrated into the organization, there are certain synergy benefits that we are realizing around overheads and G&A. Those are some of the levers. If you look at our SMU-wise profitability metrics that we share, I think Europe and APMEA have improved profitability. And Americas 2 has improved profitability year-on-year. So there is a good, again, orientation towards profitable growth. which is leading to operational improvements, Nitin.

[Nitin Padmanabhan, analyst]

The second question was around -- I think a lot of work has gone behind building deal momentum and sort of looking at the cost and all of those things over the last couple of quarters. In that context, do you think that return to growth could happen sooner rather than later overall? Are you happy with the way things are moving? Or do you see there are further areas that require fixes before we are able to really move back to growth?

[Aparna Iyer, executive]

Nitin, we have grown in Q2. I think the key for us is to really build sustainable growth that we can deliver consistently, right? And that is still work in progress. There are parts of the business which are performing much better. We've alluded to Capco. I think BFSI as an overall sector is doing very well. Americas 1 has momentum that's secular, right? And Americas 2, outside of EMR, Energy and Manufacturing, is doing well. So there is more secular return in some sense of momentum at least in Americas. For us to bounce back to growth deterministically, Europe and APMEA also have to chip in. APMEA, we're seeing some early signs of stabilization. Europe is still work in progress, and that's something that we will have to look at before we are able to give you a better color. Srini, if you want to add something?

[Srinivas Pallia, executive]

Yes. So Nitin, let me give you in the context of the deal pipeline that we have built. All I can say at this point in time is healthy. There is momentum around the deal pipeline, and it's also secular across the 4 markets and across the 6 sectors that we operate in, which is for me, good news. I think the focus for me and my team right now is how do we stick secure those wins quickly within quarter 3 and move forward on quarter 4. The advantage in quarter 4 is that the furloughs and number of working days would change. That itself is one of the positives and the deal momentum and the wins could actually add to that. So net-net, Nitin, I think, I continue to state that we have good momentum. We need to execute to that.

[Nitin Padmanabhan, analyst]

Sure. That's very helpful. Just one last one, if I may. Are you seeing an increase in smaller deals within the pipeline that could convert faster? Your peer had mentioned that in the recent call. Some of your peers have been suggesting that they're also seeing heightened smaller deals within their closures as well. So just curious to know your thoughts on what you are seeing on this aspect.

[Srinivas Pallia, executive]

So Nitin, while we talk about the pipeline, it's a combination of both large deals, midsize deals and smaller deals. That's number one. Number two, if you look at our own bookings for quarter 2. Of the $3.6 billion, $1.5 billion came in from large deals. But if you remove that $1.5 billion, the balance is a combination of both midsized deals and smaller deals.

Second, if you look at the kind of opportunities that we get, especially during the discretionary spend around Capco BFSI, some of them tend to be much smaller. They need not be large deals. Overall, the way I see it is, we do have smaller deals, midsized deals and large deals, and we continue to remain optimistic on those pipeline.

[Operator]

We'll take our next question from the line of Sudheer Guntupalli from Kotak Mahindra AMC.

[Sudheer Guntupalli, analyst]

Srini, congrats on good quarter. So just your internals are looking very good. Deal wins are looking good. You seem to sound more confident on a broad-based set of segments this time versus last quarter. However, the guidance seems to be a bit counterintuitive. So in that backdrop, a couple of questions. So when you say furloughs, so this time around, most of the other companies are actually indicating that furloughs are just in line with normal seasonality. With some of them actually saying, the furlough impact will be lower than the previous year. And historically, we had a relatively slightly better H2 compared to H1. So why is furlough such a game changer for Q3 guidance? That is number one.

And number two, when you say client-specific issues in Europe, is it some part of the business that you want to rationalize as a new CEO and you have taken a strategic call to kind of cut that business? Or is this something where we have a certain client because of whatsoever, their specific reason has been hurting us? Again, I'm asking the Europe question because surprisingly, this quarter, Europe has been good for most of the companies which reported so far. And we have been having very localized teams in Europe. So it's surprising why we are facing those challenges while others are not. So just those couple of questions. First on furlough, second on Europe.

[Aparna Iyer, executive]

So Nitin -- sorry, Sudheer, in terms of furlough, we are -- our furloughs, the visibility that we have is very similar to what we experienced last year, and that's the assumption that we are factoring in. Obviously, during the quarter, we will have to work through it with our clients. As far as lower working days is concerned, that's also something that is very seasonal for Q3 compared to Q2, both of which are factored. Additionally, we have called out for us, which is factored into our guidance, is the softness that we have in Europe. And I will ask Srini to respond to the questions that you posed on Europe.

[Srinivas Pallia, executive]

Thanks, Aparna. Sudheer. So I think Aparna answered the question on furloughs. I think for us, relative to what you heard from other companies, seems to be constant, well, what happened last year at this time. Maybe it could be very specific to the clients we are engaged with and the decisions that they take because some of the sectors have a lot more furloughs than the rest. So maybe that's one reason why we have some impact -- we continue to have the same level of impact on furloughs.

Now coming to specific to Europe and client-specific needs. I would say a couple of clients where we have been working with them have actually changed the direction because of which there have been some ramp downs. So it's very, very specific to the combination of some of the industries and Europe, which is actually contributing to that slowdown for us and weak growth both in this quarter that you've seen, Sudheer. But having said that, I want to reiterate that the countries and the specific industries that we are focusing in those countries, that pipeline has built up. And right now, myself and my team, we are focused on winning those.

[Sudheer Guntupalli, analyst]

Fair enough, Srini. So is it fair to expect that possibly when we look through this furlough and specific impacted time period of December quarter, subsequently, we'll be able to build that secular growth momentum, part of which we had seen in this quarter as well?

[Srinivas Pallia, executive]

Sudheer, as a process, we just guide for the next quarter, which is quarter 3. So you are right, in quarter 3, we got impacted for the reasons that we stated. Having said that, some of them will not be there in quarter 4. And also with the deal pipeline and momentum that we have, that should also help us going into quarter 4. But I will not be able to predict how the quarter 4 is going to be at this point in time.

[Operator]

We'll take our next question from the line of Gaurav Rateria from Morgan Stanley.

[Gaurav Rateria, analyst]

Congrats on good deal execution and solid margin execution in the quarter. My first question is with respect to the large deal momentum. If you look at the rolling 12-month data, for a while, you were stuck at $4.5 billion. And now you have crossed that and gone to $4.7 billion, $4.8 billion. Just trying to understand what has driven this change? Is it more specific to Wipro in terms of the initiatives around large deals put in place, which is triggering this increase and increase in the win ratio or something has changed around the pipeline or our approach to the overall large deal wins. So just trying to understand how sustainable is this improvement that we are seeing here?

[Srinivas Pallia, executive]

So Gaurav, if you look at in the context of large deals, what's very important for us is to be proactive with our clients. Second, we have to lead with consulting and with infused AI or AI-powered solutions. So the industry and cross-industry solutions that we have, it also helps us solution it right for the client and customize it right for the client. So the deal win that I talked to you about in the transportation industry very clearly demonstrates that, wherein we brought in our consulting arms and we brought in our industry-specific domain solutions to win that particular aspect.

Second, Gaurav, it's also discipline, right? How you build the pipeline, both proactively, how do you qualify that pipeline and then go for the win and the whole process and the nine yards that you do. So picking the right deal that you want to go after also makes a big difference, Gaurav. So there are very small changes, but sometimes these changes can impact. Now going back to your question on sustainability. Like any large deal, at the end of the day, it's a binary, right? So I will not be able to predict how it is going to go. But if you have noticed, we have consistently been above $1 billion every quarter in terms of the large deals.

[Gaurav Rateria, analyst]

Got it. The second question is for Aparna. You did allude to a couple of factors, which were specific initiatives of Wipro and topical to the company on margins. So have those initiatives already played out in the form of resulting in a margin tailwind in the last 2 quarters? Or do you think that there are some more that will be flowing into the margins over the next 2 quarters?

[Aparna Iyer, executive]

Certainly, there is a lot of effort that is still in process in order to improve, Gaurav. If you notice that -- we still have to absorb 2 months of salary increases, and it's also a seasonally weak quarter in terms of furloughs. So all hands on the deck, I think what will be very key is to execute Q3 well. And the topical levers are also at play. We still feel that there are optimizations that we can still do and achieve.

[Operator]

We have a next question from the line of Sandeep Shah from Equirus Securities.

[Sandeep Shah, analyst]

Congrats on good numbers. Just wanted to understand, Srini, post you took the control, in your assessment, which are the internal factors, outside the macro factors, which is affecting the demand, we have to correct or we have to rectify for us to go into a sustainable consistent growth path.

[Srinivas Pallia, executive]

So thanks, Sandeep. Sandeep, if you look at it, what's very important is we've laid out 5 strategic priorities, and we have to consistently stay focused on that. So if you look at the focus on large accounts in our priority sectors and prioritized markets, I think that is helping us. If you look at the growth that we got in the top account, top 5 accounts, top 10 accounts reflect some of the focus that we have brought in. And we have to stay focused. We have to be consistent around that going forward.

Second is the large deals that I just talked -- the question that Gaurav asked about, right? We have to be proactive. We have to shape the demand, and we have to understand the client, both the business and the technology needs and bringing the right industry and cross-industry solutions upfront for the client to feel comfortable about Wipro and how we can execute for them.

Third one is the industry solution itself that I talked about, right? Consistently stay focused on that, which are consulting-led and AI-powered. We have had some good successes in the last 2 quarters. And a few of this gets into implementation, then becomes more referenceable. I think you can actually more and more depend on those solutions. Fourth one is building talent at scale. I did talk about the fact that we have to have the right mindset, skill set and tool set across our employee base. After the initial 230,000 people who got trained on the basics of Gen AI, now we have got 44,000 employees doing that. So how do you lead with AI in the projects, whether it's in software development cycle or engineering? How do you infuse AI into projects which are more on the managed services, be it application infrastructure or process? And then how do you actually build the AI-powered solution, which is the conceptualization itself starts with AI, right? And so those things we need to stay focused on, building the talent also for the specific customers and the clients that I talked about on the academies, right? Sometimes it's important to understand the industry the client is in, the specific technology landscape that they are in, so it becomes much more easier for it to execute.

And the last point, Sandeep, is customer centricity, client centricity. We have defined 5 pillars of client centricity. We got to deliver. We got to innovate our delivery as the technology landscape changes. So if we stay focused on these 5 top priorities that we called out quarter after quarter, year after year, I'm sure we'll continue to get better.

[Sandeep Shah, analyst]

But despite these top 5 priorities, every quarter, we have somewhere or the other portfolio-related issue, which keeps our growth rate marginally positive, negative or flattish. So any time line when you expect whatever rectification we wanted to do would be over and we can come back on a consistent growth path?

[Srinivas Pallia, executive]

Fair comment, Sandeep, very fair comment. And if you look at it, right -- if you look at it from a market perspective, this quarter has been a little different from the last quarter where 3 out of the 4 kind of showed us some sequential growth, which I think is a positive right step. As far as the sectors are concerned, I think we continue to lag both in Manufacturing and Energy and Utilities. Having said that, I think we have got a good momentum going in other sectors, be it BFSI, which I talked about, Healthcare, Technology and Communications and also Consumer. I think we will continue to stay focused on those 4, bringing -- accelerate the momentum in those 4 sectors while we do the correction in both Manufacturing and E&U, which is more specific to Wipro than what you see in the industry.

[Sandeep Shah, analyst]

And when do you expect those corrections to start yield result in manufacturing and E&U?

[Srinivas Pallia, executive]

So Sandeep, I don't give a guidance beyond quarter 3. But having said that, I did tell you that specifically if you look at in manufacturing sector, I called out Automotive segment, I called Industrial segment. We are seeing pipeline and traction out there for us. Now the question is, if and when we win those deals, that will show up on the revenue side sooner than later.

On the Energy & Utilities segment, I did talk about specific deals in the energy sector, which is around cost optimization and vendor consolidation. Some of those deals, we are in the process, but I think we have to win. So if we do this -- if we execute to this pipeline and deals that we have in these 2 sectors, Sandeep, things should get better. But at this point of time, I can't give you a specific time line.

[Sandeep Shah, analyst]

Okay. And your earlier commentary suggest 4Q could be better than 3Q?

[Srinivas Pallia, executive]

Well, Sandeep, what I said was the headwinds we have when it comes to number of working days and furloughs, some of them may not be there in quarter 4. That's the comment I made, Sandeep.

[Sandeep Shah, analyst]

Okay. And just the last thing, post the budget, there is a tax ruling change on the buyback. So any view, will we consider buyback as a continued option to cash return to the shareholders or we may move to dividend because the tax treatment of both being neutral going forward. In buyback, you still get a benefit of a reduced share count.

[Aparna Iyer, executive]

So you've said it, Sandeep. We do think that there are benefits of buyback compared to the dividend, even after the budget that has been announced. But that said, I think we are drawing up our revised capital allocation policy in line with the strat plan that we are putting together for the next 2 to 3 years. And I think we will be in a position to share a more detailed and informed answer to your question in terms of what is going to be our approach. I think that's work in progress, and we'll do that.

[Sandeep Shah, analyst]

Okay. And just a related question, as we have indicated earlier, we now look for String of Pearls kind of an M&A rather than a big ticket M&A.

[Srinivas Pallia, executive]

Sandeep, the way I see M&A is a strategic advantage for us going forward. We do continue to look for opportunities in the marketplace, whether it's in specific white spaces, markets or sectors. So in that context, Sandeep, the first thing is look at what are the opportunities that you have in market and then take a decision. So I'm not calling out anything like a String of Pearls. But all I'm trying to do is, I want to be very deliberate and very focused in terms of what we want to do with M&A, but M&A is a big part of our strategy.

[Operator]

We have a next question from the line of Sumeet Jain from CLSA.

[Sumeet Jain, analyst]

So firstly, Srini, Aparna, I wanted to know from you in this guidance of minus 2% to 0%. What are you building for BFSI next quarter? Are you still building in growth momentum to continue, but given it has high furloughs, but you are seeing a strong momentum?

[Aparna Iyer, executive]

So our BFSI business also has a component of Capco, which has higher furloughs compared to the rest of the work, consulting in general. And of course, Capco is far more susceptible to furloughs. It is factored into our guidance. But other than that, I think the momentum in BFSI has been fairly strong. We have done well. If you look at our quarter 2 growth, it has done well across all market units. It has done across various service offerings. So we do think that the momentum in the BFSI sector from a volume trajectory is good. It is also impacted more deeply by furloughs, and that is factored as a part of our guidance.

[Sumeet Jain, analyst]

Got it. And regarding further rationalization you mentioned in Energy & Utility and Manufacturing verticals. So it has been like a slow pain for the company for the last several quarters now. So rather isn't it better to have an instant death rather than a slow pain which with certainty, we don't know -- uncertainty, we don't know when we'll get over.

[Srinivas Pallia, executive]

Sorry, Sumeet. I did not understand your question.

[Sumeet Jain, analyst]

I just wanted to understand how long this decline in Manufacturing and E&U, the Energy & Utility, verticals will continue given that for the last 7, 8 quarters now, it has been declining. So the ramp down in the client-specific areas should have been over by now? So is it like a structural problem we are facing in these 2 verticals? Because when I look at Manufacturing, particularly, it has seen a very strong growth for most of our peers plus the SAP S/4HANA transformation is a big opportunity which, you also mentioned, is playing out in your logistics client. So I just wanted to understand how Manufacturing and E&U will play out, let's say, over the next 6 to 12 months, forgetting about just next quarter?

[Srinivas Pallia, executive]

Sumeet, first and foremost, these are very 2 important sectors for Wipro. We have been in Energy and Utilities and Manufacturing sectors for a very long time. I've personally driven this business in the past. Having said that, your observation is right that we have been slow relative to the peer group in terms of our growth and rather lack of growth. However, like I mentioned, in Manufacturing, for example, there are specific segments we have continued to focus on. For example, automotive, right, there are opportunities, for example, in software-defined vehicles, which is our cloud car. That's more on the engineering side of it, for example.

Second, you yourself mentioned SAP S/4HANA. Thanks to our acquisition of Rizing, we can lead with consulting in SAP S/4HANA. So to me, Manufacturing and Energy and Utilities are very important sectors, we are staying focused on. And we also have the pipeline. Like I mentioned, even in energy, we do have pipeline and cost optimization and also in terms of cost transformation. So what is important for us, what we need to do, Sumeet, is to double down and focus on these 2 sectors and bring growth back.

[Sumeet Jain, analyst]

Got it. Look forward to that revival maybe in a few quarters. And secondly, on the deal side, I mean, we can see your reported deal wins have been good, but the conversion to revenues have been a bit slow. So is it like there is a delayed conversion of deals to revenue? Or is it like the duration of these deals is much longer, so the ACV is lower, leading to a lower revenue conversion?

[Aparna Iyer, executive]

So large deals typically have a cycle for ramping up, right? One of the large deals that we had earlier alluded to that we had won, it will take several quarters to ramp up. On the contrary, there is another large deal that we won in Q2 that has instantly ramped up and is giving us revenue. So I think it depends on deal to deal. Overall, we are not concerned about the deal conversion being slower. We are happy with our large deal bookings. In fact, while we don't give out a number, the net new in these bookings is fairly good, especially in Q2. I think we just need to focus on winning more and the conversion will happen. Yes, it takes 2 to 3 quarters for it to fully ramp up and deliver, but that will happen, Sumeet.

[Sumeet Jain, analyst]

Right. Are you seeing any sort of delay in deal closures because of U.S. election-related uncertainty in the U.S. geography?

[Srinivas Pallia, executive]

So Sumeet, I know you know it. You've been tracking U.S. politics. Irrespective of which party comes in, which leader comes in, traditionally, U.S. economy continues to grow. And the U.S. is a dominant economy, if you look at it post-COVID as well in terms of growth. So I would say the impact of politics will not be that significant, at least from my vantage point, Sumeet.

[Sumeet Jain, analyst]

Got it. And just lastly, I mean, when I look at your number of active customers, it has been consistently coming down for last 7 to 8 quarters. So any particular strategy we are following out there?

[Aparna Iyer, executive]

No, not really, Sumeet. I think we had referred to exit of certain tail accounts in context of one of our market units, which is APMEA. I think this was several quarters back. Other than that, we've also said that this number typically gets impacted because of the discretionary spend environment being weaker. And as a result, there is also -- it also impacts the number of clients, especially at the bottom end of the pyramid. What I think you should also take heart with is that our top client or top 5 or top 10. In fact, our top 25 clients are doing really well. So I'm not going to read too much into that number. I think we need to focus on driving differentiated growth in our metal accounts, in our future metal accounts, and that's what we are focusing on.

[Operator]

We have our next question from the line of Ankur Rudra from JPMorgan.

[Ankur Rudra, analyst]

Maybe the first question, Srini, if you can elaborate a bit more on the U.S. BFS, strong trend you've seen and also how that reads into discretionary spending. Your business, Capco, has got very high exposure to the capital markets segment and a segment which is seeing very strong growth recovery over the recent results season. Many of your peers have commented about how they expect that to help them. If you could elaborate how you expect to see that opportunity.

[Srinivas Pallia, executive]

Sure, Rudra. If you look at -- since the question is very specific to U.S. and BFS. The strategy for us in the U.S. market is to combine Wipro's strength of execution with Capco's consulting capabilities. So if you look at the banking financial services, capital markets, insurance; I think our go-to-market strategy is to combine the expertise of both these companies and take it forward. Now specific to discretionary spend comment that you made, obviously, if Capco is growing for us, that means there is a discretionary spend because their dependence is completely on discretionary spend, which to me is good news in the context of what's coming in the future for us because some of this discretionary spend could be also transferred to the downstream revenue as well, Rudra. So I would say, at this point in time, I continue to be optimistic around the spend in BFS as segment, especially in the U.S.

[Ankur Rudra, analyst]

Just to read a bit more into your previous comment, you said how the U.S. has been a dominant economy and financial services, if I may add, is a dominant vertical. At what point does U.S. BFS strength overcome all the small pocket challenges you're seeing in all of your other verticals where the sort of smaller challenges you see is overwhelmed by this and overall good momentum begins to look a bit stronger?

[Aparna Iyer, executive]

So Ankur, for us to really grow well at an overall org level, I think we need to have nearly all cylinders firing, right? And I think that's the endeavor. Yes, we are happy with the momentum that we have in BFSI. I think not just U.S., but across, we have a good momentum in BFSI and we are happy about that. But I do think we need to at least arrest the decline and stabilize E&U and Manufacturing which Srini spoke of. And I think that's very, very key. We need to have more and more sectors joining in. I think health is doing well. BFSI has done well. We're seeing the deals that we had won ramping up, giving us growth in Technology and Communications. So 3 sectors, good. Consumer has also done well. So if you are able to revive and win new deals in energy and manufacturing, I think, that will hold the key.

[Ankur Rudra, analyst]

Just one question maybe on AI and generative AI. Overall deal wins have been relatively strong. How are you seeing the adoption of GenAI, in particular, eat into your deal construct to an extent? Are there early conversations about potential productivity pass-throughs or gain share as a result of those constructs and the deals that you win?

[Srinivas Pallia, executive]

So Ankur, specific to Gen AI. The way I see it is there's definitely excitement and opportunity for a company like Wipro. We want to be AI-powered Wipro. And clearly, we are investing big into GenAI. In terms of the engagements, I would put it in 3 buckets. Number one is we have AI-led projects, whether it's in a software development cycle or a product engineering. That's one stream. Second one is infusing AI into the managed services, right, which could be for existing or for the new ones, where the point that you made, it's also operational efficiency, customer experience that you can improve. And the third is AI-powered solutions that I talked about, which is -- you're conceptualizing a solution for a process [indiscernible] with AI being the core. So to me, this will continue to grow. And there will be productivity benefits in each of these areas. At this point in time, the way I see it is that there are specific projects in GenAI which are going to help the clients in terms of improving some of their back office operations, if you will, right? So those are the projects that you get, but it's not necessarily a specific SDLC life cycle, but it is an opportunity for the client to improve their processes or operations and so on and so forth. So those are the 3 buckets, Ankur, I would say, GenAI and will continue to improve. Net-net, I think GenAI will be positive for us and for the industry.

[Operator]

We'll take our next question from the line of Kawaljeet Saluja from Kotak Securities.

[Kawaljeet Saluja, analyst]

Srini, contacts on a fairly good quarter overall. The question I had for you, Srini, is that when I look at your performance in Manufacturing, in E&U, in maybe Communication, though it has changed somewhat this quarter, it does indicate that it's not so much the environment, but share losses and consolidation exercise. So at a broader level, I wanted to have your view that how is Wipro positioned, let's say, there are vendor consolidation exercises at an overall level and then going into verticals, if there are any nuances as such?

[Srinivas Pallia, executive]

So thanks, Kawaljeet. You know something -- one of the things that I'm really excited is the opportunities under vendor consolidation. One of the large deals that I did talk about today is a vendor consolidation, which is a very large deal where we are doing end-to-end operations for us across infrastructure applications and process. To me, there are multiple deal wins around vendor consolidation. We have our own opportunities. We have our own wins where we have displaced the competition.

And if I look at the current pipeline, there are opportunities. And Kawal, what happens sometimes is the combination of cost optimization and vendor consolidation comes together, okay, in the broader context of cost benefit to the clients. Sometimes, the vendor consolidation happens purely because you are already dominant in one area, you can actually take care of the adjacent areas and bring in experience and operational efficiencies as well. So I'm very excited about the opportunities for vendor consolidation for us, Kawaljeet, and we are winning.

[Kawaljeet Saluja, analyst]

And in this example that you gave on vendor consolidation, who did you consolidate out? Are you consolidating out other India heritage vendors? Or are these legacy vendors who are on their last legs?

[Srinivas Pallia, executive]

Kawaljeet, I'm sure a lot of people are listening to this conversation. All I can say is that it's a variety of vendors across the spectrum. That's all I can say.

[Kawaljeet Saluja, analyst]

Okay. Fair enough. The second question I had is for Aparna. Aparna, when I go through your expenses in the IFRS financial statements, it appears to be quite busy with a number of notes. Was there any one-off benefit into the quarter? Because there seems to be a number of line items in which there are some one-off charges, there are one-off gains. If you can just walk me through what's really happening in margins here?

[Aparna Iyer, executive]

Yes. So Kawal, if you look at it, we did have a higher S&M and we have a lower G&A. And if you look at SG&A as a bucket, there is no change. If you look at our operating margin improvement, that's come through the gross margin improvement. The noise that you've referred to, yes, we have had certain one-off credits, which are a part of our financials. But there are also [indiscernible], it's part and parcel of every quarter. And what I will request is perhaps Abhishek or Dipak can take you through those items. But if a broader direction that you can look at is S&M and G&A as a bucket have more or less remained flat and the improvement is coming in through the gross margins.

[Kawaljeet Saluja, analyst]

Got that. And Aparna, what kind of the environment do you require to get to your aspirational band of margin or aspirational margin number? Actually, it's not even aspiration, it's getting there almost, but if you can just walk me through it.

[Aparna Iyer, executive]

So are you asking me for levers? Sorry, I didn't get the question clearly, Kawal.

[Kawaljeet Saluja, analyst]

Environment. The type of environment required to get to the EBIT margin that you aspire for?

[Aparna Iyer, executive]

So Kawal, we've laid out, like you rightly said, we are one step to that 17% to 17.5% target band that we'd laid out several quarters ago. We are happy with the performance that we've had in Q2. We have taken one big step towards that. Obviously, in Q3, we will have to work through the headwinds that we are starting the quarter with. I think all hands on the deck as far as quarter 3 execution is concerned. Perhaps at the end of quarter 3, we will be in a better position to tell you how the margins look beyond. I think over a long term, for it to like really, let's say, touch and sustain beyond 17% operating margins, we have said that the revenue environment also needs to improve. A lot of the margin improvement that we've delivered is on the backdrop of revenue decline. So certainly, the growth in revenues will help the trajectory, both to surpass that 17% and also sustain, Kawal.

[Operator]

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to Mr. Dipak Bohra for closing comments. Over to you, sir.

[Dipak Bohra, executive]

Yes. Thank you all for joining the call. In case we could not take any questions due to time constraints, please feel free to reach out to Investor Relations team. Have a nice evening. Thank you once again.

[Operator]

Thank you, members of the management team. On behalf of Wipro Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.