Cautiously optimistic about future growth: Wipro

India's No. 3 software services provider Wipro has declared its second quarter results. Its consolidated net profit stands at Rs 1,610 crore verus Rs 1,580 crore on quarter-on-quarter (QoQ) basis.

In an interview to CNBC-TV18, Wipro's management, executive director and chief financial officer Suresh Senapaty, chief executive officer-IT biz  and executive director TK Kurien, executive VP-HD Pratik Kumar, speak about the results and give their outlook going forward. Below is the edited transcript of the interview with CNBC-TV18's Udayan Mukherjee. Q: The big number is that the volume growth for your company still continues to be fairly tepid, 0.2 percent. When do you see meaningful improvement in that number? Kurien: Our strategy, which we laid out in the beginning, a couple of quarter ago, was pretty much clear. It was to drive value on one end and make sure that we get efficient execution engine sitting in our core. So, over the past couple of quarters, we have been investing significantly in intellectual property. That is really reflected, to some extent, in our volume growth. Lower volume growth is reflected in higher pricing. If you look at our pricing, our pricing onsite has gone up by 1.9 percent and offshore by 1.5 percent. Also, if look at cloud, mobility and analytics, they have done extremely well. Overall, if you ask me, I am not that worried about the volume growth portion because I think at certain point of time, after you get the efficiency, that will start kicking in. If you look at our net additions, they have actually gone up to over 2,000 people. We have not cut back on our hiring. So, we are, I would say, cautiously optimistic, as far as the future is concerned. Q: At a time when your peers are generating 4-5 percent volume growth you are reporting pretty much flat QoQ. When do you see deals picking up, because the street will not like to see this kind of anaemic volume growth even if you can eke out small gains in pricing? Kurien: The demand estimate has not really changed too much over the past quarters for us, but in the end of Q2 we saw an uptick coming in, in terms of just deal closures, so in that extent again cautiously optimistic. I would not say that I see a blowout future ahead of us, but I clearly see more optimism than I saw a quarter again. Senapaty: If one looks at the Q2 numbers, we have done basically well in terms of the guidance that we had given. We have said that part of it was muted because the India piece of the business, which used to have a higher growth, did not and was not even forecasted to have. Therefore, there was a little bit of mutedness. Even in Q2, if one looks at the actual numbers that we have delivered and look at it on YoY basis, it comes to 7.5 percent based on what we have delivered. If one does a factoring of the India IT piece of the business, which tends to be growing at about 25-30 percent, we could have been much higher, but it was not the case. In the India market, the interest rates are higher, currency is an issue, telecom is not spending money, no capital investments are taking place. But recent past developments that have happened with the new Finance Minister and a cabinet reshuffle, definitely, there is much more hope than before. We are also banking on it to be able to get back some of those growth rates as we go forward. Other than that, the YoY is about 7.5 percent on a constant currency basis. Having said that, while Q2 guidance was about 0.3-2.3 percent, in the Q3 guidance we have improved, which is about 1.2-3.2 percent. We think we are in the right trajectory. Our top 10 accounts have grown 8 plus percentage sequentially in Q2. We have added one more customer to our USD 100 million basket. We have added two more customers to our USD 75 million basket. We have added 50 plus customers in the last quarter. We have in some form improved the tail customer by about 30 of them. We are focusing on the right thing in terms of mining. We are focusing on the right thing in terms of hunting. It has been reflected in terms of pipeline. We have grown well on the energy, natural resource and utilities. The growth which was muted so far as our BPO and IT infrastructure services were concerned two quarters back has come back to their growth trajectory. Healthcare services which had muted growth rate in Q1 and Q2, as we go forward based on the deals that we have won and the trajectory that you are seeing, that will start kicking in. We are expecting financial services, retail and RCTG to be kicking in. From that point of view, some of the areas which had been muting growth whether from a practice or a vertical standpoint, we are getting over that. Continued slackness would be there in terms of investment banking and capital markets and sort of the telecom OEMPs and the semiconductor area. Otherwise we are seeing pretty decent movements. The Q3 approach that we have taken vis-à-vis Q2 is good. Hopefully, we will come out better as we go forward because the investments are in that direction. We have increased the sales and marketing by 1 percent at this point YoY. We have increased the sales and marketing 20 bps QoQ. There is this particular investment that is happening, focused attention being done on the back end from a standardization point of view. It takes some quarters, but we are in the right direction. Q: The pricing improvements that you spoke about is it one off or do you see that as a rising trend over the next few quarters? Kurien: It is reflecting the strategy that we laid out for ourselves. We don’t think we are going to drop pricing. _PAGEBREAK_ Q: This quarter the margins were pretty good – in fact higher than our expectations what is just a factor of pricing or did you have any improvements on issues like offshore and onsite mix because utilization has not improved between quarters? Pratik Kumar: There are host of operational measures we have been working on. Those have helped us in mitigating the full impact of the wage hike which we took during the course of the quarter. Broadly, on the people front, I would say that it was a quarter of very satisfying execution on multiple fronts. Our attrition numbers are down. We have executed as per the hiring plan. Students whom we have communicated on campuses on their joining dates - we are maintaining that and they would be coming on board in a staggered manner over the next two quarters. In addition to that, we have gone ahead and communicated our plans to give restricted stock units to about 1200 managers across the board. These are whole lot of those positives, but in addition what is equally important is we are investing in the right places. We are bringing in leaders with the right kind of skill sets where we think we need to supplement our existing capabilities internally. All these measures with very keen and tight focus on productivity measures internally is all resulting in what we are seeing in the results. We hope to maintain the trend going forward as well. Q: EBITD numbers are not bad for the current quarter – how much of the benefit came in through the pricing improvement and the other factors which may have kicked in this quarter? Senapaty: Substantially it was pricing improvement. The other good factor is that we have been able to have a better cash flow management last quarter. The Wipro Technology part of the business, the days of sales outstanding (DSOs) has improved by 3 days on year on year basis it will be about 10 days. That has improved our cash flows which is in excess of our net income for the quarter. It is a reflection of the quality of revenue and the quality of contracts that we get. It is the kind of transition we have been looking for and is happening. Q: Your growth has been lacklustre in the US market at about 1.5 percent. Can you tell us about what is happening with clients in the US geography specifically? Kurien: If one looks at large outsourcing deals, there were quite a few of them out in the US. We are seeing some closure happening there towards the end of Q2. Hopefully, after the elections, we see that trend kind of accelerating. Because the reality is that in the US growth is coming back, so again cautiously optimistic about the US. As far as Europe is concerned, there are again plenty of opportunities, but primarily opportunities driven by large term cost plays. In some cases, they involve takeover of people, takeover of assets. We have a certain capacity to do that and beyond that we will not do deals in that particular area, if it involves substantial takeover of assets. Pipeline in both these geographies are looking pretty strong. What we are waiting for is closure. We are hoping to see that in the next couple of quarters. Q: What was the key driver or the rational as far as you are concerned from the demerger that you unveiled yesterday because the market has imputed many motives from the logic of separating the two businesses to trying and avoid fresh float of stock coming in to the market to meet with listing requirements - from your perspective what was the key driver? Kurien: From my perspective, I can talk about customers and employees. From a customer perspective, what happens is it improves focus as far as we are concerned. When we are a conglomerate, what you stand for, what you believe in and what you execute Q2 are kind of a little fussy- they are more based on the financial returns than customer value. The biggest thing that gives us is the customer value. Same is the thing with employees, the kind of people that you hire and the kind of people that you managed through your pipleline, would get to be more technology oriented that what we have had. From employee perspective, we believe that this will help us to attract better talent- from a customer perspective, more focus. Senapaty: Many would have many times questioned us as to whether this kind of corporate structure is the right structure. Because typically the stock of Wipro gets covered only by IT analysts and fund managers who are interested in the IT point of view, people invest into the company primarily for IT. I cannot say that nobody is interested in the other parts of the business, but largely it is like that. Given that particular context, the board has always been discussing this particular issue and so we took this particular time to do it. We had to do this split because we thought that for the IT services and IT products business it is important to have a pure play, so that there is value maximization for shareholders and also upsides that Kurien spoke about from customers, employees, target companies and prospective employees’ perspective. We thought the scale of the non-IT piece which is Wipro Enterprise Ltd. is significant enough to standalone despite the fact that they have leadership positions in multiple businesses. They are in infrastructure businesses, furniture businesses, lighting businesses, and consumer care business in India etc. There are smaller in sizes, but multiple of them. It was important for us to be taking that out into different company. In that context, we said that the minority shareholders could be given multiple choices. They could be given choices of equity into that particular company, they can be given choices of exchanging that equity with the IT stocks from the promoter because that perhaps is the main reason why they stayed invested in Wipro or they can get a redeemable preference share, which they can cash out in 12 months time.