Jul 29, 2013 10:25 AM IST | Source: CNBC-TV18

Seeing pickup in US, Europe, expect stable margins: Wipro

Wipro, India’s third largest software service exporter is fairly confident of growth in upcoming quarters given the pick up in large deal closures in first quarter and recovery in key markets like US and Europe.

Wipro, India's third largest software service exporter, is fairly confident of growth in upcoming quarters given the pick up in large deal closures in first quarter and recovery in key markets like US and Europe.

Echoing the sentiments of its other IT players, Wipro also showed enthusiasm about higher confidence among customers.  "Surprisingly we are seeing parts of Europe also picking up. To that extent I remain fairly positive in terms of the quarters going forward," TK Kurien CEO & Executive Director told CNBC-TV18.

The company has also seen positive momentum in price realization over the last six quarters. The company is confident of stable pricing environment going forward. 

Suresh Senapaty, Chief Financial Officer indicated that there could be some volatility in the company's margins over a short term but over a medium to long term margins are expected to remain stable with a positive bias.

Wipro has guided for nearly 2-4 percent sequential growth in revenues. The company indicated that second quarter revenues could be in range of USD 1.62-1.65 billion. The Bengaluru based company on Friday reported a 11 percent year-on-year (3 percent sequentially) growth in first quarter net profit from its continuing operations (IT business) at Rs 1,623 crore. Revenue increased 5 percent from a year ago to Rs 9,735 crore in the April-June quarter.

During the first quarter operating margins had a 50 bps advantage because of rupee depreciation. While in the next quarter too the company would benefit from rupee depreciation, margins could be impacted due to two month of wage hike.

Although the company did not gave any specific guidance about hiring Pratik Kumar, Executive VP-Human Resources said, "If anything going forward there could be a little higher bias towards people whom we bring from campus, so that is unlikely to change." Since last 6-8 quarters, the company has been investing in customer facing roles, architect roles.

Below is the verbatim transcript of the discussion with Wipro management.

Q: You see the next quarter growth at 2-4 percent which is fairly encouraging. Is this kind of growth sustainable? Are you seeing sufficient revenue momentum that perhaps we can extrapolate this guidance for the future quarters?

Kurien: Here is what we are seeing. Every quarter when we give guidance we typically look at deal closures in the previous quarter and what we expect to close during the quarter and from that perspective we continue to remain fairly satisfied with what we have seen with both our order book and with the kind of deals that are coming in. Part of it has also been the macroeconomic recovery that we have seen in the US and surprisingly we are seeing parts of Europe also picking up. To that extent I remain fairly positive in terms of the quarters going forward, primarily driven by what we have done in the past two quarters.

Q: You had earlier hinted that in the second half of this fiscal year this is December as well as in the March quarter Wipro once again will start seeing growth rates that is similar to the industry, is that on track?

Kurien: That would be clearly what we are gunning for. We don't give guidance for Q3 and Q4, we typically give a quarter to quarter guidance so to that extent I can't tell you that with certainty but that is the kind of endeavor.

Q: I see that the company's discontinue the policy of giving a separate break-up between volume as well as pricing but just to speak on pricing has there been any kind of pressure on the pricing front because a couple of your peers who have already reported their numbers have indicated a little bit – we have seen their realisation on pricing slip a bit on quarter on quarter basis- what it has been at Wipro and can you talk more about how the pricing environment is looking going forward?

Senapaty: If one had seen over the past few quarters Wipro has generally been holding its staple with a positive bias as far as price realization is concerned. You play on the run the business and change the business and when you are participating in change the business and little bit on the discretionary spend one tends to get leverage.

Having said, that even on the run the business when the engagements are more and more outcome based, one has ample opportunity to be able to drive productivity, automation and so on to be able to improve and part take in the participation of that sales that one is able to achieve.

Overall, we have seen a positive momentum in terms of price realization over the last six quarters, As far as Q1 is concerned we have stopped giving this split between the price and volume growth but I would more say it is a much more stable pricing environment that we have seen in quarter one as we go forward. Primarily because the engagement models are changing which is helping the customers take out cost and yet Wipro to be able to retain its price realization because the productivity drive is able to help us make that achieve so far as the customer is concerned.

Q: What has been the benefit of the rupee depreciation on your margins in this quarter?

Senapaty: If you saw the rupee depreciating about 9.5 percent on a closing spot-to-closing spot beginning of the quarter to the end of the quarter it happened a lot in the last few days of the quarter and therefore the capture was minimal and we have had an advantage of about 50 bps on the margin based on the currency world curves, while rupee depreciated by 9.5 percent the average was only 3.4 percent and from that perspective 50 bps was the plus so far as our impact on the margin for Q1 was concerned as compared to Q4. We had some headwinds in the form of a compensation increase of about 50 bps. We had sales and marketing increased investments of about 50 bps and yet the margins were quite in the narrow range between what we have delivered in Q4 and Q1.

Q: Next quarter there will be an impact on account of two months of wage hike. To what extent will that be? You have indicated that the rupee depreciation only benefited you all in the fag end of the quarter. Next quarter what is your expectation of how much of a tailwind rupee depreciation will provide?

Senapaty: I think you are right that there is a tailwind and there is a headwind both and there are not only those two but there will be many other levers that will be playing around. You will have to also appreciate that we do not give specific quarter guidances. I can just assure you and make you feel comfortable that it has delivered narrow margins in the previous quarters and as we go forward medium to longer term we will see stable margins with a positive bias. On short-term basis there maybe some amount of volatility, because you have multiple levers playing ups and downs and therefore you cannot be so precise and it is not part of our guidance too.

Kurien: If you look at our portfolio, our portfolio has two components to it. There is the regular business that is what we call run the business and there are the new services that we have which is what we call change. On the change side we are not seeing pricing pressure, on the run side what we are seeing is a huge push on the part of customers to reduce cost and that side fundamentally what we are doing is moving our models to outcome based models and by doing both these simultaneously, fundamentally our belief is that we would be able to keep our margins in a narrow band, that is really what we are looking at. There maybe quarters when there will be volatility, but long-term our belief is that it will actually go up.

Q: Given the fact that you are seeing some revenue momentum going by your Q2 guidance is there a case for perhaps increasing your hiring target for the entire year and where does it currently stand at?

Kumar: We have in any case been investing in that over the last several quarters. There are two levers to our hiring efforts. One of course is the campus hiring which we continue to bring people onboard and that has been steady. If anything going forward there could be a little higher bias towards people whom we bring from campus, so that is unlikely to change. I think more important is where we are investing and what kind of talent. The kind of talent we are investing in really is in the customer facing roles, key critical, architect roles and over the last 6-8 quarters that has really been our endeavour. We are beginning to see the results of it and going forward we will do more of it. It is linked to the way we see our own needs and the kind of capabilities we need to actually build in and as well as how we are seeing the market evolving for us.

Q: What would be the hiring target for the full year?

Kumar: Just like all other guidances we do not guide on our overall hiring numbers either.

Q: Will it be higher than last year?

Kumar: It is difficult to say right now. We continue to fine-tune our hiring efforts as we look forward and on a Quarter-to-Quarter basis how we see it. Our campus hiring effort is yet to start for the next year and that is another quarter to do away and we will make that call what the numbers would look like as we get closer to that.

Senapaty: When you are looking at more and more of this industry becoming demand constrained as opposed to supply constrained what is the forecast with respect to headcount add is not very meaningful because it is no more a lead indicator for you to be able to ascertain what the growth is going to be. There will always be demand for right kind and quality of people and that component will be supply constrained but not necessarily across-the-board. So we thought that is not anymore relevant for us to be communicating and guiding on while internal plans would always be there, so that we will never get into a supply kind of a constraint when there is demand already in the market.


Q: The net headcount addition at Wipro at least for the last few quarters has been fairly muted in last two years or so, but despite that utilisation has continued to remain at subdued levels and even this quarter we have seen a slight decline in utilisations on a sequential basis. What is the target level of utilisation that Wipro is seeking to achieve by the end of this fiscal year and when will it fire as a margin lever?

Kurien: If you look at our utilisation itself we are not particularly bothered by the utilisation dip that we have had. The gross utilisation level is marginal at best. The reason for that is pretty simple. Number one is we continue to hire people from campus based upon a program that we have laid in place. We are not changing the dates of hiring. We are just keeping them absolutely constant. The second thing that we are looking at clearly is driving hyper-productivity in our existing engagements. As we drive hyper-productivity there would be parts of the workforce that would come back and sit in the bench for sometime and these would get redeployed as newer projects start. So typically we are not really bothered by the quarter end numbers which is what we report. We are really looking at trying to see how we can keep that within a narrow band and redeploy our entire workforce and make them more effective. I think that is really what we are trying to do. If you look at the traditionally business that we have we typically ran a pyramid weight structure in terms of staffing. In the newer businesses that we have the structure is no longer a pyramid, it is a diamond-shaped structure. To that extent you will require more experienced people sitting in the middle who are more expensive and what you get in turn for that is better realisation and better profitability while in the other hand if you do not squeeze your existing business harder and harder in terms of pulling people out of projects, it is going to be very, very difficult for any company to sustain margins. That is the game that we are at.

Kumar: Seasonal fluctuation and utilisation is something which we will see from time to time. I do not think it needs to be read too much into. The fact is that we have invested significantly in processes, technologies to be able to manage our supply chain in a very, very robust way and that gives us lot of confidence. What you see what gets reflected in utilisation are plans to bring people onboard, so you will see some of those spikes and dips from time to time as well as ensuring that we have the right kind of people to be able to drive growth going forward. So it is combination of both.

Q: You have alluded to a strengthening deal pipeline, improving deal win ratios on the restructuring deals. Could you give us a few numbers?

Kurien: We do not break out numbers separately in terms of what we do in each segment, but I guess the only way to read our results is that you should wait for the Q2 results to come out and then look for our Q3 guidance. Unfortunately, I cannot give you specific numbers on each of those components.

Q: Do you have the confidence to call this revenue momentum secular?

Kurien: The minute I say that then I am giving full year guidance, I unfortunately cannot do that. But frankly from what we see today there are couple of positive trends that we see. One is the economies in which we play. Those economies are clearly improving. Discretionary spend is coming back slowly. There are still areas like high tech telecom, especially on the R&D side which continues to be stressed, investment banking on the banking side. Yet there are bright spots on the flipside which we think kind of give us confidence that growth will come back.

Q: If the outplacement debarment clause of the Immigration Bill is passed in the house bill then what will be the impact? I am sure you will have quantified it internally and if you take offsetting measures perhaps increase the number of employees that you have on-site etc then what will be the impact on the margins etc.? Explain to us how significant the impact of that clause will be?

Kurien: I think all three of us are not the Chicken Little kind of guys so it is very difficult for us to figure out what is going to happen when the sky falls on our head. It is a very tough one. Fundamentally, what you could ask yourself is do you have mitigation measures in place to take care of an eventuality if that happens, I think that is fundamentally the kind we are playing. We don't believe this controls governments.

Senapaty: I think you have made the question much more simpler saying that if the house bill were to get passed as oppose to Senate bill getting passed because the Senate bill has a lot of provision which are harmful and the house bill does not many of them. From that point of view it is a good sign. I think the discriminative provision in the house bill is very limited as compared to the Senate bill, but I think there is understanding between the two governments as well as the industry in the US and India that some of this particular provisions are not necessarily good from an US and India trade point of view. Our own expectation is the house bill is much more balanced except few provisions which we think as and when they get passed will not have that element also. If it were to be there it could impact Indian companies as well as some US players too and therefore it will take the cost so far that may not be in the interest of the US companies too. That is where the strong confidence or strong view that perhaps some of that will also get much more moderate will be eliminated.

Q: All these mitigation measures as you said will come at a cost, so how much higher will the cost go up and will then Indian companies become uncompetitive compared to the others because the cost of delivery for us has gone up now.

Senapaty: I don't think so. When you talk about the house bill per se it has a fair amount of level playing field, except a very few slivers of it and from that point of view it is not as bad as that you saw in the Senate bill. I am sure there will be lot of appreciation from a customer point of view with respect to some of this if that still does not get corrected. I do not think the sky is going to fall or it is going to be too prohibitive to run the business. The business model will readjust to whatever is necessary from an overall compliance and making sure that there is cost factor which gets mitigated.

Kurien: The key is this. Will cost translate into pricing? That is the fundamental question that you have got to ask yourself. Today the way I see it is that cost would probably translate directly into pricing, because our competitors in the US are clearly going to use this as an advantage to increase pricing. Similarly, if our costs go up I am pretty sure that competitively all of us out of India will also raise our pricing and that is really the question. What it means is it is not necessarily going to be good for the consumer.

My own sense is governments over a period of time never do things that are bad for consumers because they all realise that they have to go back to the polls every four years and to that extent that is a huge positive and that is what keeps us most people honest and that is what gives us confidence that whatever is going to be come down the pike is not going to be as bad as we assume it is going to be. But nevertheless as a company it is important for us to make sure that we have risk mitigation in place, so that if the eventuality does happen we are able to react to it with speed.

Q: You all sounded fairly positive on the US business last night when you were holding the press conference, but US actually degrew in the quarter gone by. It was down 0.6 percent in constant currency. Why is that and what is the expectation from US?

Kurien: As far as we are concerned that is again another blip. The way we classify revenue is based upon invoicing. If you look at some of our US customers they have asked us to invoice to other parts of the world based upon the delivery model that they used and that has really resulted in a swing. If I go back to my US customer base and look at the revenue impact there that is marginal to nothing.

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