Can Capita plc Sustain Its Turnaround Amid AI Investments and Structural Shifts?

Capita plc (LON:CPI) has embarked on a high-stakes transformation, balancing strategic divestments, cost discipline, and aggressive AI integration to revive its fortunes. Recent financial results suggest progress, but sustaining returns will hinge on executing its “Better Capita” strategy amid lingering challenges.

Financial Performance: A Mixture of Gains and Growing Pains
Capita’s 2024 adjusted revenue fell 8% to £2.4bn, driven by reduced volumes in its Contact Centre division and deliberate exits from lower-margin businesses. However, cost-cutting measures—totaling £90m—propelled adjusted operating profit up 5.5% to £95.9m, while the reported operating loss narrowed sharply to £9.9m. A standout driver was the £180m net proceeds from selling Capita One, which helped slash net debt to £66.5m, down from £182.1m in 2023.

The company’s free cash flow, however, remains strained, with an outflow of £122.3m (excluding business exits). This underscores a critical hurdle: translating cost savings into sustained positive cash flow. Capita aims to turn free cash flow positive by year-end 2025, projecting outflows of just £45m–£65m.

AI as the Engine of Transformation
The linchpin of Capita’s strategy is its push to embed generative AI (gen AI) across operations. By December 2024, AI-driven efficiencies had generated £140m in annualized cost savings—surpassing its initial £160m target—prompting a revised goal of £250m by 2025. Tools like CapitaContact, used by the London Borough of Barnet, and AgentSuite, which boosted call center efficiency by 30%, exemplify this shift.

These initiatives have begun paying off. Customer satisfaction metrics improved dramatically, with the net promoter score (NPS) rising to +28 (up 12 points year-on-year), while contract renewal rates jumped to 92% from 51% in 2023. Such gains suggest clients value the tech-driven service enhancements, even as Capita scales back commoditized offerings.

Structural and Operational Challenges
Despite these strides, Capita faces headwinds. Employee engagement, as measured by eNPS, plummeted to -33 in 2024—a stark reflection of the strain from restructuring. While voluntary attrition dropped to 21.7%, retaining talent in a competitive tech environment remains critical. The company’s “Better Company” initiative, focusing on leadership development and cultural reforms, aims to address this, but progress is yet to be proven.

Another concern is revenue stability. Capita forecasts 2025 adjusted revenue to be “broadly stable” versus 2024, but achieving growth will require new wins in high-margin sectors like public services and technology-enabled solutions. Its recent wins—such as the Royal Navy’s Warship Bridge Simulators and SATs test paper delivery—highlight opportunities, but scalability is uncertain.

Debt and Capital Structure
Capita’s refinancing in March 2025, including £94.2m in US private placement notes at 7.4%, extended its debt maturity profile, easing near-term liquidity risks. The 15-for-1 share consolidation, effective April 2025, aims to simplify capital structure and support future dividends. However, the company’s leverage ratio (net debt/EBITDA) remains a watch item, though well within covenants.

Outlook: Can the Turnaround Hold?
Capita’s near-term success hinges on three pillars:
1. AI Execution: Delivering £250m in cost savings by end-2025 while scaling AI tools like the Capita Career Assistant (which cut recruitment time by 50%).
2. Cash Flow Improvement: Positive free cash flow by year-end . This requires managing pension deficits and working capital more effectively.
3. Cultural Turnaround: Reversing the eNPS decline to stem attrition and foster innovation.

The numbers are cautiously optimistic. With adjusted operating margins expanding to 4% in 2024 (up from 3.5% in 2023), Capita is on track to hit its 6–8% medium-term target if AI-driven productivity gains materialize. The 92% contract renewal rate and rising client satisfaction also bode well for recurring revenue.

Conclusion
Capita’s transformation is showing tangible results—profitability is improving, debt is falling, and client loyalty is strengthening. Yet, sustaining returns will require flawless execution of its AI agenda, stabilization of revenue, and a cultural revival.

Key data points reinforce this duality:
- Positive Trends:
- £250m cost-savings target (vs. £140m achieved)
- 92% contract renewal rate (vs. 51% in 2023)
- Debt reduction to £66.5m (down 64% since 2023)

• Risks:
• Revenue stagnation at £2.4bn (down from £2.6bn in 2023)
• Employee engagement at -33 (vs. industry benchmarks often above +10)
• Free cash flow still negative at £122.3m

For investors, the stock’s valuation—currently trading at 6.7x 2024 adjusted earnings—suggests limited upside unless margins and cash flow improve decisively. Capita’s path forward is clear, but the execution will determine whether its strong returns are a temporary blip or the start of a sustained turnaround.