Wipro says market share gains likely in 12-18 months

Wipro, India's No. 3 software services exporter, reported an 18% rise in quarterly net profit, meeting expectations, as customers outsourced more work to the company to cut their operational expenses.

Consolidated net profit rose to Rs 1,580.2 crore for the fiscal first quarter ended June 30 from Rs 1,481 crore a year earlier for Wipro, which counts Citigroup Inc and Cisco systems Inc among its clients.
India's USD 100 billion export-driven outsourcing sector faces diminishing hopes of an early revival in demand as their biggest markets, the United States and Europe, grapple with an uncertain economic and political climate.
We managed to maintain pricing despite tough environment, CFO Suresh Senapaty told CNBC-TV18 in an interview.  
Earlier this month, Infosys Ltd, the no. 2 software exporter, made a bigger-than-expected cut in its revenue growth forecast for the current fiscal year. But sector leader Tata Consultancy Services Ltd beat expectations with a 38% rise in quarterly net profit.
 
Wipro managed a constant currency dollar revenue growth at 0.3% quarter-on-quarter, inline with their guidance. The first quarter cross currency impact stood at USD 25 million.  
The IT major said its top five clients grew by around 5% sequentially. "Our focus was on client mining," TK Kurien, CEO (IT business) & Executive Director says adding, "market share gains likely in 12-18 months."
Wipro added one USD 100 million client in Q1 and has a total of eight such clients now. "The retail banking division is showing good growth but we have seen some pricing decline in investment banking," the management told the channel.
Delayed projects and overall slump in the IT services segment are forcing tech majors to push back joining dates of freshers. IT majors such as Infosys and Mahindra Satyam are all grappling with their existing bench before they can accommodate fresh recruits.
However, Wipro says it is not looking to cut back on hiring to protect margins. "We expect margins to hover in a narrow band," the company officials say. Here is the edited transcript of the interview on CNBC-TV18. Q: You have missed your revenue guidance by a little bit in the current quarter. Why is the top-line or the dollar revenue growth continuing to be sluggish?
Kurien: First let me clarify, we haven't missed our guidance at all. I just want to put that point straight on the table. If you look at constant currency, we have delivered Rs 1,540 crore. So we haven't missed our guidance. In fact we had guided negative 1% to positive 1%. What we have ended up with is 0.3% positive. I am a little surprised by that comment, but nevertheless I just wanted to clarify that.
_PAGEBREAK_ Q: It's still not a spectacular set of numbers. You may just have managed to do it in constant currency, but not in dollar terms and you have exhibited 0.8% volume growth. That's nothing to be very proud about, is it? Kurien: Not at all. But, remember that in a market like this, fundamentally what we have done is we have held our pricing or more or less held our pricing. Our offshore pricing has been down 1%. Our on-side pricing has been up 0.2%. Our days of receivables is 69 days and it's probably among the best that we have seen, at least in this quarter.
If you look at our top five accounts, we have growth roughly about 5%. You can look at a glass half full or half empty and frankly from our perspective, we see it half full. We just see opportunity in this space and all we could do is go out there and execute the opportunity that we see. Senapaty: If you have to appreciate that in Q1 we have seen a significant amount of volatility in rupee-dollar, euro and therefore in dollar terms we are meeting the guidance except for that cross-currency because cross-currency impact was USD 25 million. It has been unprecedented compared to any particular quarter.
Hence, I think when you look at the fundamentals of the business yes, I appreciate it is volume, it is pricing, it is everything and from that point of view it is USD 40 million and not USD 15 million. Therefore, if you look at the guidance for the current quarter, which is Rs 1,520-1,550 crore at the backdrop of USD 15 million that we delivered for Quarter 1, which is a guidance of 0.3-2.3%.
It is for both legs being on the positive side as opposed to what we guided in quarter 1, that is minus 1% to plus 1%. We had said in Quarter 1 that Quarter 2 would be a better quarter and as we are guiding today, Quarter 2 is turning out to be a better quarter.
_PAGEBREAK_ Q: The point is that as a leading player in the IT space, you will always be compared with the benchmark in the space, TCS grew its volume by 5.5% in the quarter and you have managed 0.8%, so strip the currency etc aside, which is common for all companies. When do you get back to industry leading kind of growth or at least in line with the top peers that you compete with? Kurien: Here is what it is. If you step back for a minute and look at the strategy that we have led for ourselves about a year ago, we told ourselves that we have to mind our accounts better and that has reflected in just two things. One is our top five account growth and also more importantly it has reflected in the number of USD 100 million accounts that has been there. It had gone up to 8 this quarter. Quarter-on-quarter (QoQ) we have increased that.
There is a second phase to this whole strategy and it included going out there and hunting for new logos. We have set up a separate team which is now hunting new logos and that team is about 130 people right now. That is adding to our funds. Now for that to kick-in we think that it is going to be a 9-12 months period when we can be aggressive and kind of start gaining market share.
As far as our volume growth is concerned, as far as our current growth is concerned, the existing base that we have today, we expect that number one, it is not going to be a sectoral change, we are not going to see sectoral increases or decreases, fundamentally it is going to be very customer based.
To that extent today we are selling far more in our existing customer base from the kind of services that we want to sell. That has reflected in our analystic information management business. For example, where you have grown year-on-year (YoY) over to about 21%.
If you look at our energy and utility business, we have grown significantly in this quarter. Overall, we are pretty confident about our strategy. I think we have to just watch QoQ to see the way it is going to play itself out, because fundamentally we don’t give yearly guidance. Senapaty: We are also seeing some portfolio correction. For example, we used to have a very low financial services. It has grown over the period but, if you look at the portfolio balance in terms of retail banking which is growing much faster and we have also grown under retail banking very fast in Q1, while overall financial services has not been as good on the retail banking side. We have been good.  When you are comparing with some of our peers, they already have a higher weightage on retail banking.
We are trying to transition into getting more growth in retail banking. Similarly, if you look at the telecom vertical, we used to be very more weighted towards equipment manufacture which is going through some kind of a transformational change and consolidation phases.
We have, over the years, expanded into more and more telecom service providers and our vertical like energy and oil and gas utilities is firing, healthcare is doing well, manufacturing is doing well. India is generally very good ground for us along with the Middle East. But as you have seen, we had talked about Q1 being a weak spot and continue to be because on a reported currency basis, in dollar terms in 9% sequential negative, 1.9% on a rupee terms. Generally, Q2 is expected to be very good.
But we don't expect too much in the current quarter too. Hopefully, some of the changes that we are seeing in the political system and some kind of changes that we could be looking forward to perhaps in the second half would look much better. But, definitely at this point in time, Q2 is not weak but Q2 strength is not visible.
So it would be much more flattish. Those are the good spots which are undergoing some changes and as we move from that phase, we should be able to catch up our growth rates. Q: Your workforce will be happy that you have decided on wage increases. Was it tempting though given that your neighbour in Bangalore has decided to have a freeze on wage hikes, to consider a lower hike got to wait and watch for a bit longer before you went ahead with increments? Kumar: Our decision to go ahead does not get influenced by what happens in our neighbourhood or otherwise. We had sent a message to our employees. That’s a part of our plan. The way we have rolled it out and we are very happy to be able to just go along exactly the way we had planned it.
In some sense, it was a quarter which was a no surprise quarter. It also signifies in some manner, fairly sound execution. Not only on the front of salary hikes which we went ahead with, our attritions have also held steady on a trailing 12 months. The impact has come down by about 2 percentage points. Our utilizations have remained strong, our hiring plans remain intact. If you look at all these parameters of measurement on the people front, there are things out there from where we can actually draw satisfaction from. Senapaty: Also if you look at it from a financial side, despite many others declining on the margins, we have expanded margins by 30 basis points despite giving compensation, hike effective June 1. Cash flows have also come out very good. 57% of the net income is of free cash flow and 74% of our net income is operating cash flow.
Our DSOs has been outstanding at about 69, perhaps amongst the best today based on some of the reported numbers that are seen in the market. So, coming to that big point in terms of what is the choice of customers? Choice of deals, quality of contracts is where we are focused on and hopefully, we will stay on course and make it a much more healthier place to work for.
_PAGEBREAK_ Q: You will be able to hold margins though given that pricing has been sluggish for the last couple of quarters and that these wage highs are going to kick in this quarter? Kurien: The way I see it is that margins would remain in a narrow band. If you go back and look at what we have done last quarter, number one was wage increase. The second was that we increased our sales and marketing spends by 0.7%. That is probably one of the highest quarterly increases we ever had.
Overall, from our perspective, this game is going to be a much longer term one because the way the market is playing itself out is very different from any kind of market that we saw over the past decade.
A lot of us made our top-line and made our money from being in the augmentation business in various forms and shapes. All of us packaged it differently but, fundamentally that’s what it was. I think the market is going well. It's a question of playing on two axes, value and scale. You really have to pick up service lines that you have and play on scale as well as play on value.
When you play on scale, you have to look at increasing productivity. If you look at the number of hires that we have had this quarter, we haven't cut back our hiring. If you look at the kind of skill mix that we are attracting, it is very different kind of a skill mix in the value segment. Overall, margins will probably remain in a narrow band. But, we will not cut back on what we believe are long-term investments. Q: Was the wage hike prompted also by involuntary attrition which is just refusing to cool down? Kumar: This is also the quarter when we go ahead and complete our annual appraisal assessment. Post that there is a certain percentage of people who are counselled out and therefore, a slight bump up in involuntary attrition is not something which is entirely surprising.
If you look at the trend over the last several quarters, our involuntary attrition is at a level of about 2% and more than 2% is fairly standard in the quarter where we have these appraisal assessments and discussions. It tends to go marginally higher, which is exactly what we have seen in this quarter. Q: Given the kind of transition you spoke about in the market place, what impact does it have on pricing because we have seen some pricing sluggishness in many of your peers, do you expect to experience that for the remaining quarters of this year, a dip in pricing? Kurien: If the question is are you seeing pricing declines, the answer is probably we are seeing it in 1-2 segments like investment banking, but it is not a secular trend. Now the defense against the pricing half of declines that may come down, one is productivity and the other one is the kind of services that you sell.
Even today there are services where you can get a premium in certain segments to the overall average pricing that you may get in the basket. Our game would be to see how we can get the price premium, where we can in segments where we can manage that and more importantly drive productivity in the scale there.
_PAGEBREAK_ Q: What's going on with geographies like America? You spoke about some of the verticals, but America is down 2% plus this quarter. Do you expect underperformance from this very critical geography to continue? Senapaty: I don't think that has anything to do in terms of an early warning or any kind of an indication. It is more a portfolio play that we have and definitely like you saw some of the weaknesses in terms of equipment manufacturers, in investment banking or capital market area.
Some of that tends to be little more concentrated in US and as a result of which that decline was there. But we have seen a very high PAT growth. We have seen constant currency Japan also very high. But I don’t think the geography comes into play in terms of any kind of a secular trend. We won't want you to read anything more than what is just reported. Kurien: Just to kind add-on to what Senapaty just mentioned, if you look at three segments, if you look at the geography segment, if you look at the consulting segment and if you look at the application development and management segment, those are the three segments where you have had a decline. The decline is primarily being caused by a customer base and investment banking which has remained in North America and a couple of other customers which come from telecom.
Those are the two areas that have really contributed to this. But again to Senapaty's point, this is not a secular decline. Frankly, if you can't compete in the biggest markets in the world and probably the most technologically advanced markets in the world, you will give up shares somewhere else. That's clearly a focus area for us. Q: On the evidence of what you have achieved in Q1 and what you are guiding for Q2, the first half looks like you are lagging the NASSCOM industry guidance of 11-14% will you be able to catch up in the second half? Kurien: If you look at it, number one, we don't give annual guidance. What we do give is a QoQ guidance. But in Q2, typically what happens is that we get a 0.8% bump up in our quarter numbers with the India business. In Q2 we are not seeing that and that has got a lag effect and it is kind of playing itself out in our overall guidance.
I don't want to comment on the NASSCOM estimates because at the end of the day we look at our customer base and we have an idea of how much we can grow in our customer base. That is what we believe is going to be our secular growth rate.