Wipro expects volume decline in fixed price contracts

Software services provider Wipro, which reported better-than-expected earnings for the third quarter on Friday, says there is significant positive change in demand ennvironment, but volumes in fixed price contracts are expected to decline.

The company gave a muted guidance of 0.5-3 percent US dollar revenue growth in the fourth quarter. The company says the lower guidance is due to debt ceiling uncertainty and uncertain deal ramp ups. "If you look at the environment itself as far as our business is concerned, from the time we were sitting last year, the same month to this year, I think there has been a big change in just the environment itself. It has become a little more positive...The bad news is that from our perspective we see two challenges - one is that we see the fiscal cliff talks still continuing and from an India perspective we don't know when finally the budgets would come in and what it would mean in terms of buying in this quarter," said TK Kurien, CEO - IT Business
Utilities and energy continue to be best performing verticals and it has seen deal closures there and in some other sectors like healthcare. However, the telecom sector remains slow and its telecom R&D business continues to decline, Wipro said. Below is the edited transcript of the interview on CNBC-TV18. Q: Could you have given a slightly more aggressive guidance because you did quite well in the current quarter. The street probably was expecting something between 2 to 4 percent guidance, but you have just been a bit short of that. Are you still cautious then going into the next quarter? Kurien: If you look at our guidance, we have always guided on absolute numbers within a certain range. What we have done this quarter is that if you look at the environment itself, as far as our business is concerned from the time we were sitting last year, the same month to this year, I think there has been a big change in just the environment. It has become a little more positive than it was around the same time last year and that’s a good news.
The bad news is that from our perspective, we see two challenges. One is that we see the fiscal cliff talks still continuing and from an India perspective, we don’t know when finally the budgets would come in and what it would mean in terms of buying in this quarter. Traditionally, Q4 has been a strong quarter for us in India.
The other little bit of concern that we have factored in is that we have won a lot of projects in the last quarter and we have taken into consideration when execution would start or when ramp ups would begin. I think that’s what we have factored into the guidance. To that extent, the environment is looking much more positive than it was looking last year.
From our own perspective, we have built in a little bit of caution into our guidance to make sure that we don’t fall short if the environmental conditions turn negative. I think that fundamentally would reflect on the guidance. Q: Your dollar-revenue growth for the current quarter is about 2.2 percent. Can you just break it up into what you saw in terms of absolute volume growth? Whether there was any kind of pricing improvement at all and would you classify this as the beginning of some kind of basic turnaround after a few sluggish quarters of performance? Kurien: I will break it up in three things – pricing, volume and both of those go hand-in-hand. But, before that let me just take you back into the customer environment that we deal with. If you look at our customer environment, you have two parts of the business – one we call run and the other one we call change. That's how customers break up their budgets.
On the run side of the business, we are seeing a decline in the run budgets. While on the discretionary budgets, which are part of the change side, we see it coming in quarter-on-quarter and we see spikes in that part of the budget.
If you look at the run part of our business, we have been driving a lot of efficiency in that particular segment and if you look at it, the volume growth for us is negative, it is negative of a percent. But on-site pricing is up and offshore pricing too is up.
On-site pricing is up 3.4 percent. Offshore pricing is up 3.1 percent and these pricing increases come after the last quarter where we did very well on the same front. To that extent, we see productivity being a massive driver for us on the run-the-business side and we see that continuing. We are going to drive more and more productivity by the use of tools and technology on the run side of the business.
On the discretionary spend side, we see volume coming back, but that really depends on customers actually opening up their purse strings and spending. While there have been some sign-offs that we got in the last quarter, we expect to see that fructifying in this quarter and the quarters to come. I think that is primarily what is happening as far as our volume and pricing is concerned. Senapaty: If I can supplement, I think we have seen growth in healthcare life sciences. We have seen growth in retail and consumer goods. We have seen growth in energy, natural resources and utilities. So, these are the three businesses which has given us good growth and similarly from a practice point of view, business application services and also in terms of infrastructure IT services, both of them has done very well in terms of growth.
The big thing are the good wins that we have got and it has been led more by advance technologies, whether it is Cloud, whether it is analytics or a machine-to-machine. More and more solutions in the mobility area have helped us win very large deals in the last quarter.
Overall, we have got about 50 new customer added and a lot of those customer adds are in healthcare life science area or CTG area as well as in energy and natural resources. Therefore, we are seeing some elements of positivity in terms of a growth momentum that we have seen in the last quarter. Q: What is it that you expect to see in terms of volume growth for the next few quarters and how much more on pricing improvement? Senapaty: We have always stated that you have to look at revenue from a totality point of view as opposed to volume and pricing because if you are looking at them as fixed price, you are looking at them on an outcome base and you have to drive more and more productivity because that not only helps you to be able to be competitive, increase profitability and make customers much more competitive in their own marketplace, but also helps you win deals much better.
So the very fact that we have driven productivity much more last quarter than the quarters before, in some form it has a spin-off effect in terms of the volume. But, these are temporary phenomena. We are not saying that we will give you only pricing to go forward, it will be a combination of both. But, we are not necessarily disturbed about whether the growth is coming in the volume or the pricing. It has to be a combination, but what mix, how much it is here and there on a QoQ basis is very difficult to judge because it is a function of a fixed price project and different phases of that particular project, different customer base etc.
But, we would more encourage you to look at overall growth as opposed to price and volume based growth because volume is something that can be fulfilled. Gone are those golden days where supply was a constraint, it is more in terms of a demand constraint environment other than a supply constraint environment. If there is a demand, you will have the fulfilment available.
_PAGEBREAK_ Q: Where are attrition rates at this point? Whether you are considering any salary hikes over the next couple of quarters? Kumar: I will just give you a brief summary of what we experienced in the quarter and I think on an overall basis it was good, it was a satisfying quarter for us just on the people’s side. We continue to invest in talent hiring, especially at mid to senior level and we are investing them in specific roles where we think we need to strengthen ourselves to complement our existing talent pool.
You are right. Our deep focus on engagement has seen a steady decline in the attrition rates. This quarter in particular is down by almost about 1.6 percent from where we were in the previous quarter and then this quarter, on a quarterly annualized basis it is at about 12.9 percent. We think that there has been a steady decline through the quarters. We should be able to maintain the same trend even going forward.
We continue to invest in capability building and training, especially in areas where we need to ensure that we have the right kind of skill sets and also at the same time drive organizational simplicity as we go into new lines of businesses and new geographies. That has been the effort and I think that effort is beginning to yield results which we are seeing in the numbers that we have shared. Q: While your investors would be encouraged by the 3 percent plus pricing increase, they would also fret about 1 percent decline in volumes. Is this a trend that you expect to see reversed in the next couple of quarters or do you expect this trade-off to continue? Kurien: What we will do is on the run side of the business, we will continue to drive productivity as we move from time and materials contracts into more fixed price and outcome based contracts. So in that area we will see a volume decline. On the other hand, on the chain side of the business, as we bring in more revenue we would see a bump up in terms of volumes.
Overall, at least in the next one quarter, I see it remaining in a fairly narrow range and then probably a pick up after that as discretionary budgets come in. On the other hand, the run business would continue to have significantly lower volumes. Kumar: We are already through with the salary increase cycle and we did share it about a quarter back. That is not something which is on the anvil anytime soon. We are already through with that exercise. Q: Earnings before interest and taxes (EBIT) margins actually held up quite well in the current quarter, is it just a factor of better pricing or do you have other levers, which you can use to hold it at these levels in the quarters to come? Senapaty: The levers that we got last quarter is definitely pricing in a big way and definitely, that was a positive thing with respect to currency and of course, for us it meant more investment in terms of front-end, so far as the customers are concerned. We are constantly investing in the front-end and in the sales and marketing engine also. We are also investing more on back-end to be able to create process assets. That process will continue always when there is a gain and there will be some kind of an investment taking place to be able to prepare ourselves to partner with the customers and win in the marketplace. Q: Can you give us a sense in terms of which verticals it is that you saw improved deal closure on and where you are seeing greater traction? Kurien: If you look at our portfolio, our portfolio leader continues to be energy, natural resources and utilities. We have seen significant deal closures on that particular area. We have also seen deal closures happening in healthcare. Healthcare has been pretty strong for us. Also on the retail banking side, we have seen closures. To that extent, it has been a decent quarter.
There are some verticals where we have been stressed partly, where we are overweight in terms of portfolios like telecom. There we have seen some bump up in terms of deal closures, but we do not expect that to be a secular trend. We think that the R&D business that we are in on the telecom side would continue to go down and that remains an area of focus for us in terms of making sure that we focus on a few customers and concentrate on deep product development work rather than scattering ourselves across many customers.
Similarly, what we have also done in the past quarter is that we have brought down our tail accounts from approximately 86 a quarter ago to about 20. That has been a pretty significant decline again and that has to some extent affected revenue. What you are seeing right now is the rebalancing of the portfolio on one end and focus on growth and areas that we would really want to focus on.
If you look at our top USD 100 million relationship, it has gone to 10 this quarter, up from 9 last quarter. Six quarters ago we had just one relationship in that particular segment. Our growth on our top 10 accounts is inspite of the fact that our top account has degrown by 4.6 percent and rest of the accounts have actually grown by 4.5 percent. So our strategy is broadly paying off. I guess the way we see the challenge is to make sure that we get hyper growth which is really going to come from gaining share and that is what we are focused on going forward.
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