Don't see any structural issues in medium-term despite dip in Q1: Wipro's Neemuchwala

Even as Wipro gave out a weaker-than-anticipated dollar revenue guidance for the first quarter of FY18, CEO Abidali Neemuchwala sounded confident there are no structural issues on the growth front in the medium term.

Project cancellations in the healthcare space, and slower ramp-up of few deals in the telecommunication sector are prime reasons for a muted guidance following a strong fourth quarter show, Neemuchwala said in a post-result interview with CNBC-TV18.

Wipro was the market leader in the Obamacare business, which was repealed by the Trump administration, and that has led to project cancellations and expected losses in the first quarter.

The company is doing well in other verticals like BFSI, manufacturing, and energy and utilities (E&U). The retail segment, which had been muted, has started seeing traction due to the company’s digital offering, he said.

The margin in the next quarter could be strained due to various reasons like slower revenue growth, impending salary hikes and currency volatility headwinds. However, things are likely to improve from the second quarter onward, said CFO Jatin Dalal.

While wage hikes may not be across the board and as much as last year, the company will continue to hire people in digital and new technology spaces, said Chief HRO Saurabh Govil, adding, attrition for the company is currently at an all-time low while utilisation levels are at all-time high.

Below is the verbatim transcript of the interview.

Q: The guidance has really shocked the street. Negative growth to start the year in FY18. If you could tell us what is baked into this guidance and what should we expect from healthcare as well as retail in the coming quarters?

Neemuchwala: As we have guided and said in our commentary, we see some issues especially in healthcare given that we have market leadership in the Obamacare space and that is undergoing a repeal and replace and till we have clarity on what it is going to be, we have had about three project cancellations in that space and that is contributing to the negative growth from Q4 to Q1.

Also, some of the engagements in the telecom communications vertical have come to a logical conclusion and some of the deals that we have won are taking longer to wrap up and that is also contributing towards the dip from Q4 to Q1. Although all the other verticals whether it is baking and financial services, manufacturing and technology or our consumer business as well as energy and utilities (E&U) will grow and the growth momentum will continue into Q3 and beyond.

E&U, as we had said last time would bottom out in Q1 actually, it has bottomed out a quarter before in Q4 as you saw. Now we have growth and we continue to expect growth going forward. So, while Q1 will see a dip and a negative guidance that we have given, in the medium-term we do not see any structural issues from a growth perspective and we are relatively optimistic about it.

Q: In your press conference you indicated that healthcare will bottom out in Q1. What about on retail? You had also spoken about softness in retail. Is that going to be a one-quarter phenomena or do you expect the weakness to persist through FY18 on retail?

Neemuchwala: Retail softness is more an overall industry issue and what we see, I had talked about in Q4 and we continue to see that in Q1, and we will continue to see that in the near future because the entire retail industry is undergoing a fundamental transformation.

What I am optimistic in retail about is the digital transformation that we have as a capability that a lot of retailers are requiring and we are starting to see the traction in the retail segment through our digital offering which does not result into a huge quarter on quarter dip but there is an overall softness in growth that we see in retail.

But otherwise, I feel optimistic about our participation in the segment where the spend is under pressure over there given that retailers are having challenges in terms of online retail versus traditional brick and mortar model.

Q: I know you do not give us a quantitative guidance on margins, but directionally, if you could tell us, how would FY18 margins compare with FY17 as you see it now given the headwinds on currency as well as on a couple of sectors?

Dalal: As you mentioned, we do not give guidance for margins specifically, but let me give you colour on how we see the margin in Q1 and then for the rest of the year. Q1, we will have certain headwinds. One in the form of the one-time benefit that we had in Q4 will not repeat. The revenues would be slightly lower. We will also invest in people by going ahead with our merit salary increases from June 1.

The currency, as you are aware, is volatile. So, there are headwinds for Q1 and therefore, we will have to be watchful for the margins of Q1. But Q2 and on, we feel that the margins should return as the growth comes back and some of our structural investments like acquisitions or restructuring of India-Middle East business should start creating positive synergy on revenue and costs and that should help our margins in remaining part of the year, apart from host of operational improvements like automation and AI engine and so on and so forth.

Therefore, we feel that we should improve margins from Q2 onwards and directionally, we have said that barring currency volatility, we want to remain in a narrow band in FY18 of what we have delivered in FY17.

Q: You have not announced a dividend for this quarter but you have indicated that the board will consider a buyback in July. Would the total pay-out in FY18 buyback plus dividend be the same as what we have seen as per your historical records?

Dalal: We have maintained in past that our pay-out ratios would be 40-45 percent. Last year our pay-out ratio, which was dividend plus buyback was 48 percent.

As you are aware we have announced a 1:1 bonus today as a recommendation from the board. So, we will have two actions, one would be the bonus and then what we have said is that the board will consider a buyback proposal in July 2017. Once the board considers and deliberates it and shares the final quantum at that time we will be happy to share with you.

Q: If you could tell us what is the proposed wage hikes for FY18? How would it compare with the prior year? Would wage hikes be a little more muted this time around? Utilisations have improved to 81.9 percent, sustainable at these levels?

Govil: Let me first speak to you about the merit increases. As we plan, every year we will have it effective June 1 this year. It will be in-line with what industry is doing. It will be muted, it will be selective, it will be in-line with the industry. It will be less than last year, that is the way we have panned it out. It will be very differentiated for different kinds of people but we will do it both onsite and offshore effective June 1.

On the utilisation, if I look at the overall people supply chain, our attrition numbers are at all-time low, our utilisation is at all time high. I have been speaking about this for last 3-4 quarters, we have grown our utilisation. In the current scenario of hypo-automation very clearly we see we have further headspace to improve our utilisations. So, we will drive this operation parameters as we keep going in.

On the hiring side we continue to recruit from campuses, our localisation drive is continuing. We will hire people for new technology areas like digital etc. So, that gives you an overall perspective about where we are from a salary increases and utilisation point of view.

Q: FY19 you will be hitting industry growth rates for the full year and do you still maintain your USD 15 billion revenue target by FY20?

Neemuchwala: We feel very confident of matching industry rates as we exit FY18. FY20 number of USD 15 billion is an ambition, it is not a target. We feel very energised about having that ambition and the entire organisation is investing in capabilities, building capabilities to be able to get as close to that number as possible. We feel good about it, although we may not hit that number because it is not a target but that does give us a direction in terms of how we in-flex our growth rates and create a outcome of our journey towards this ambition.