Q1 traditionally weak quarter; bullish on Q2: Wipro

Given the fact that the first quarter of the financial year is traditionally a weak quarter for Wipro’s Indian business, one should not read too much into the guidance, says chief executive officer TK Kurien.

“Last year, we ended up with negative 1.4 percent in Q1. Our Indian business traditionally has degrown in the Q1. Degrowth (in Q1) is not something unusual, we get it every year,” he said in an interview to CNBC-TV18. The street is disappointed with Wipro’s guidance of USD 1,575-1,610 million from IT services in the first quarter, up just 1.6 percent at the higher end. (Read More). However, the management is optimistic that the quarter after that will be a much better one, compared to the same period last year. Suresh Senapaty, ED & CFO highlighted that the company’s top ten clients have delivered well on an annual basis. “Our top ten customers in last one year grew by 17%. Our onsite pricing is up 4.2 percent, our offshore pricing is up 2.7 percent,” Kurien added. India’s third largest software services exporter said that its deal pipeline continues to be stable and the company is likely to perform better in FY14 than FY13. Though the company expects to see some volatility in margins in short-term, it expects margins to sustain with an upward bias in the medium-term. Wipro’s Q4 employee attrition rate was the lowest in two years at 12.5% and the company will take a final call on wage hikes in June. “June is our annual cycle of salary review. The increase in whichever form we end up giving would be in single digits, but we have yet not inked in terms of what that quantum is likely to be,” Executive VP – HR, Wipro and President, Wipro Infra & Engineering  Pratik Kumar added. Below is the verbatim transcript of their interview to CNBC-TV18 Q: The Street is extremely disappointed with your Q1 guidance, minus 0.6-1.5 percent. What do you see which has led to this kind of a guidance for Q1? Kurien: If one looks at our Q1, our Q1 has traditionally been weak. Last year we finally ended up with negative 1.4 percent. That was our final number, so to that extent I do not think one should read anything more than what is given in the guidance primarily. Our Indian business traditionally has de-grown in the Q1 and de-growth is not something that is unusual. We get it every year. The bigger thing for us is when one looks at the quarters ahead what do the quarters look like? Sitting where we are we are far more bullish about Q2 than we were at the same point last year in the same quarter. So, we still see hope in the quarters to come. However, besides that I would not read anything too much into it. Q: The other issue that quite clearly stands out from these numbers is that while your top client has grown the rest of the top 10 clients have not grown. Is that a bit of a concern going forward because that is something that analysts have pointed out to and what has led to this bit of decline in top 10 clients? Senapaty: So, far as these kinds of numbers are concerned to look at on a quarter-to-quarter it may not be very appropriate. There will be certain projects which we would be ramping down, but over a year if one looks at the top 10, they have delivered well and so is our top 50 accounts. If one has seen the number of accounts that has gone up in terms of 100, 50, 75. It is already showing an improvement over the last two years. Going forward, we are strengthening and deepening our client engagement managements with dedicated people working on them.  Also with a support from delivery architecting and business development, one will see an support from all the practices in terms of advance technology areas. In infrastructure services space or Value Added Services (VAS) space one will find that the growth that you will be looking for from these 125 accounts on an overall basis will continue to be the growth drivers for us. We have also invested a lot of in terms of our hunting engine. Today if one looks at the component of pipeline that we have from hunting, it has significantly improved. So, we are looking at growth both from the top 125 accounts what you classify them as Mega, Gama, Nurture and Growth, apart from just trying to get more from the hunting engine. Overall we feel very comfortable in terms of what the strategy that we have and that it will start firing in the medium to longer term. In shorter term it may not have shown as much as we would have wanted it to be. We are also looking at more and more tail account cleanups, but as one goes forward most of the confidence that TK talked about comes from the fact that we have got those accounts under control and the management of that is pretty deep. Q: Coming back to that, you said that you are bullish about Q2. In general, will FY14 be better than FY13 and secondly, previously you have indicated to various analysts that the deal pipeline has improved, how has been the deal conversion have you seen an improvement in the win ratio? Kurien: The top 10 customers in the last year has grown 17 percent. Our onsite pricing is up 4.2 percent and our offshore pricing is up 2.7 percent. So, in a way if one looks at the strategy that we have followed and the kind of approach that we have used in terms of service lines to push up pricing on one end and deepen up client relationship is paying off. The second piece of it is sitting where we are, are we looking at a better 2013-2014? We do not give full year guidance. So, I cannot in all honesty, answer that question for the full year. However, I am more optimistic to where I am sitting this year compared to last year. The bigger thing is that the fundamentals of our strategy were dictated based upon our customers and our employees. If one looks at our customer satisfaction in last quarter, our customer satisfaction as far as our annual National Pension Scheme (NPS) score has been up 13 basis points (bps). This puts us right amongst the top in terms of global peers. In terms of employee satisfaction, we have had the lowest attrition over the past two years. So, those are the positives. I think what we want to do is in this quarter, we will announce our salary increase, which we will continue to remain and we will announce that on June 1. In spite of that we see operational levers from a profitability perspective to keep us broadly in the range in which we are. So, to that extent, we remain committed to employees and customers and yet we think we have the operational play. That is required to keep our profits where it should be. _PAGEBREAK_ Q: Tata Consultancy Services (TCS) has given 4-7 percent wage hike. There has been a bit of volatility, recently we saw Cognisant letting some people go. What has been the kind of scenario that you are witnessing and what kind of wage hike would we expect? Kumar: As TK mentioned that June is our annual cycle of salary review and we remain committed to that date. As we get closer to that timeframe we should be able to take a final call as to what is going to be the quantum and size. So, it is still early, but we do believe that the increase in whichever form, we end up giving would be in single digits. We have yet not inked in terms of what that quantum is likely to be so, would not like to speculate right now. Q: The sense I got is that you are likely to maintain your margins in 20-21 percent, which you have been doing for the past many quarters even in FY14 despite the salary increase. Is that true, you get the sense that margins will be maintained above 20 percent? Senapaty: In medium to long-term margins are sustainable with an upward bias. In short-term basis there maybe volatility, but the way we are seeing it of course so far as quarter one is concerned there is some amount of headwind in the form of the salary increase that we will have in impact for one quarter. We will see what we can do in terms of operating parameters improvement. We do not give any specific guidance for example if you saw quarter four, the margin drop is about 60 bps, but the currency drop was 70 bps. We did an operational improvement of 10 bps. So, net-net the impact was only 60 as oppose to the currency impact of 70. However, we will have a headwind so far as compensation is concerned, but hopefully we will get something else to be able to mitigate some or full profit as we go along. We do not give any specific guidance for currency. But medium to longer term whether it will be sustainable? Yes, with a positive bias. Q: Analyst wrote in a report that Wipro seems to be lacking a broad base traction in terms of deal pipeline, while the deal pipeline is up 1.7 times. You normally make it to the two of the shortlist candidates in terms of big deals, but you are not able to close some of these deals and in that sense it is one step forward and two steps backward for Wipro. Any comment on that and how the deal pipeline is looking going forward? Kurien: I cannot comment on being there in the last two, not winning. I think that is a far better situation than not being in the deal at all. So, to that extent deal flow by itself has not changed; it is positive. The biggest thing that we have to focus on as a business and more for our customers is, we have to remain invested in the areas where customers believe are their focus areas and that’s the endeavour. So, in our deal pipeline, the whole focus is around trying to get proactive and trying to see what we can do on a sole source basis. However, yet competing hard for the commodity business. So, that is the approach and that is kind of a bearing fruit. Asset can be seen by the realisation up ticks that we have seen in the past year. _PAGEBREAK_ Q: Infrastructure service has been doing very well overall. What is the kind of opportunity that you see in infrastructure management services in FY14 as well and will it continue to grow at higher than company average and because of competitive intensity are you seeing any pricing pressure over there? Kurien: I guess from a technology perspective I look at infrastructure services. I think we are the biggest in the country as far as infrastructure is concerned. Our endeavour would be to make sure that our leadership position in that segment does not falloff. The second piece as far as pricing is concerned. I think that is a business that has commoditised at one end and highly specialised at the other end. So, as you start moving into the cloud the areas get more specialized. The pricing that one is able to get in that segment is significantly higher, yet in the low end of the business it remains much commoditised. So, you cannot play in one without playing in the other and to that extent we have been playing in both. However, our approach has been to manage mix and use tools and non-linearity as means of getting higher realization. We have successfully demonstrated in the past year, hopefully we will completely do that as we go forward. Q: We recently spoke to Tata Consultancy Services (TCS), they said that they expect that scenario to continue. Going by your guidance where at lower end you are forecasting a bit of a degrowth, is that fair to assume that the body language at Wipro maybe is not as confident as maybe it is at couple of other companies maybe TCS for particular? Senapaty: The valid observation if you only look at negative 0.6, but hopefully it will change when you look at a positive 1.7. So, depending upon how you want to look at it. It is important to understand that traditionally so far as Wipro is concerned, it has been a weak quarter. Our percentage of revenue that comes from the India, Middle East business is pretty decent and from that point of view, it has a higher weightage what it does in Q1 versus what it does in Q4. Plus what you said is that some of those deals that we were expecting to be signed off in Q4 has moved and we will get closed in Q1. If that should have been closed in Q4, we would have got that number here. But as they are yet to be closed that is why we are of the view that this number that we are talking about were more comfortable in that range rather than anything superior to that at this point in time. Kurien: If you look at Wipro’s same quarter last year that is Q1, it was negative 1.4 percent. To that extent, what you are seeing today is an improvement over what we had guided last year. So, better sentiment, more hope, slight upward bias in the bottomed of the estimate. However, what you should do is also look at the top end of the estimate. Ultimately, our ambition would be that we are going to deliver in a range. There is a natural de-growth that comes in from the India business. How much we make out of that natural de-growth, up by our external business that has come outside of India. It is going to be what we are going to be looked at, as we end the quarter. Q: This draft US immigration bill, is this just an irritant or do you foresee it as turning out to be a bit of a headache going forward? Kumar: We are still trying to go through the final details. We are yet not sure what is the final shape or the legislation is like to be. In fairness, all of us either individually as companies or industry associations or other stakeholders, our customers, they have had an opportunity to be able to share our points of view. We are hopeful that the final piece of legislation would be able to incorporate many of the suggestions and inputs, which have gone in. However, what it does not takeaway from our point of view is our strategy to be able to invest in the local talent pool. This has been our strategy now for almost close to about more than five years. We will continue to do that. Just as a data point of our total talent base, which is there in the United States, about more than 35 percent are people who have drawn from the local talent pool. We will continue to invest that.