Margin growth from acquisitions to come in Q3-Q4: Wipro

Regarding oil prices, he said that crude is still in a zone which is not comfortable for discretionary spending to click on. “There will be lumpiness in performance,” he said.

President & Chief Human Resources Officer Saurabh Govil said the focus is on reskilling 20,000 odd employees.Below is the transcript of Abidali Z Neemuchwala, Jatin Dalal and Saurabh Govil's interview to CNBC-TV18's Kritika Saxena.Q: Help me understand the guidance for the second quarter. By the looks of it, it is a fairly flattish quarter. Break up the kind of outlook that you are expecting, where is the sluggishness expected to come in from?Neemuchwala: The guidance is a forecast of the revenues that we see at a point in time when we give the guidance and that is what we see right now in growth terms and just to give you a sense of where we are, the overall technology spend with most of our clients is not significantly increasing. However what is happening, as I mentioned earlier which you referred to is the run spend is moving into the digital transformation spend. We see a certain level of pressure on the run side as they drive productivity. On the digital side we are seeing a lot of deals. We are very bullish about the demand over there but the deal sizes are relatively smaller although last quarter we signed one large deal and as the digital deals start becoming bigger the revenue reduction that happens on the run side due productivity will be more than compensated by the digital side as the deals become bigger and that is what will give incremental growth at the right levels.Q: How long would that take, say 2-3 quarters, till when will we actually see the transition period ending and actual impact of the digital services coming in, can we say 2-3 quarters?Neemuchwala: We have not given timeline. I am already starting to see deals in that front and then there is a Wipro specific transformation that strategically we are doing within the organisation in terms of increasing the level of mining, increasing our localisation apart from driving digital Wipro Homes platform which is the artificial intelligence platform for which we are seeing very good traction. Our robotic automation which helps us with margin improvement and driving the cost point which delivers us margins inspite of the commoditisation of services and high level of localisation in markets where we do business, all of these are part of the strategy that we are executing and all of this put together at different times will start kicking in and you will see an uptick in the growth numbers.Q: By when can we say that Wipro will be back to industry leading growth rates, give us a timeline because the market has been waiting for blockbuster numbers. It is a difficult market, there are seasonal headwinds but by when can we say that Wipro will be back to industry leading positive performance?Neemuchwala: Any transformation of this kind takes a few quarters but you don\\'t have to wait for all of those quarters to get over before you see the first signs. So, you start seeing certain signals, you start seeing certain uptick and what I say as a turnaround is when we are inline with the ambition that we have put out and that we have given very clearly as USD 15 billion by 2020. So, that will take definitely a longer time for us to get to that trajectory but early signs start getting visible in the next few quarters.Q: How many quarters is that?Neemuchwala: We have not publically given any timeline so I can't give you that but it is not too far in the future.Q: Can we say by the end of this fiscal there will be some more clarity and better visibility then?Neemuchwala: Absolutely that is what I said last time when you had asked me this question and I don't deny what you said.Q: Margins have been very sluggish in this quarter. You have had the impact of wage hikes, acquisitions, you had the impact of some amount of lower profitability coming in from India and Middle East as well from what you pointed out in the press conference but with many of these factors missing in the coming quarters, will you expect some more upside, will you have more visibility in terms of margins in the next quarter?Dalal: The overall context is that we had to make a choice and we have made a choice and we talked about it in the beginning of quarter one that we will make investments for securing our future. I think variety of ways we have done it. One has been the investment in acquisitions which does dilute margins in short term but it is something that gives us a tremendous opportunity in business process as a service model that we did for HealthPlan Services. Similarly we have invested in form of salary increases in some of the high expertise workforce that we have hired in quarter one, that is the second angle.Of course there is a lower profitability in India, Middle East business because we were doing some restructuring. Also we have invested in certain client relationships where we believe that it is important to stay with the customer and grow a relationship from volume standpoint and we can catch up on our margins as we go. So, this is the context of Q1.As we look forward fundamentally we have two months\\' salary impact which is still to come in and we will need to work through, mitigate it as we go forward. However the good news is that apart from that for the rest of year there is no other large visible known cost impact. Our endeavour would be that in Q2 we mitigate substantial portion of the headwinds that we are seeing ahead of us and work through for the rest of the quarters on improving the margin trajectory.Q: How long do you expect the impact or the sluggishness in India and Middle East market to remain?Dalal: We are undergoing a business relook, we did a part of that in Q1 and we will see it in Q2 too. I would think that couple of quarters might be lower than their historical trajectory profitability that we will have to work through. However I think we have taken a substantial impact in Q1 which we have articulated and it will remain lumpy in Q2 also but Q3 onwards I see a positive momentum in India and Middle East from thereon.Q: Another troubled sector has been the energy vertical, this quarter in constant currency terms it is down by 4.1 percent but it is largely owing to the volatility in the market. You were pointing out how the market is now seeing slower decision making cycle but do you expect that impact to get lesser by next quarter onwards given the fact that there is some kind of revival expected in decision making?Dalal: We will watch it very carefully because until the oil price is still in a zone which is not comforting for discretionary spend to come back in the sector there will lumpiness in performance. We have multiple times felt that it is bottoming out but we have remained in the range. So, I would be cautious in hinting a secular recovery in that sector but performance may remain lumpy and any incremental gains that may come we are quite confident of capturing that because all through these all few quarters we have consolidated our positions with our large customers and we therefore feel that we will have a great opportunity to capture any incremental spend that customer has to offer.Q: Do you believe that there is a need now given the kind of volatility that there is in the energy market? Wipro has been leading versus its Indian peers as far as the energy and utilities vertical is concerned but because of the volatility is there a case for change in strategy where you try to reduce the focus on energy? Neemuchwala: You are absolutely right; we are not depending purely on the energy prices to recover as our sole strategy for the energy and utility (E&U) vertical. We have pursued an alternate strategy to diversify that vertical more so that growth can return to that business unit and one early indicator of that today I announced, large deal that we have won for an airport in North America which is part of the EPC vertical and that is our execution on the strategy of diversifying the E&U vertical. While the energy prices come back and we see the discretionary spend returning, we also make it up with some of the other sub verticals within the same SBU and those investments are starting to show some very early results. Q: You have had space for inching up utilisation and to be fair utilisation has gone up for this quarter coming at about 69.9 percent gross. What is the band; is there further case or could there be an upside to utilisation in the next coming quarters? Govil: Let me take a step back from overall supply chain to give you a perspective on why it is critical the way we look at utilisation for our margins as well on our hiring plans, on our utilisation on a bench and as well as on a overall utilisation. Hiring as we have said, we have been saying that we will continue to hire people from campuses whom we have on-board given offers earlier and we continue to on-board them but clearly the focus of the organisation is moving towards re-skilling people and more and more focus is coming there. Plan is to re-skill about 20,000 people in the digital technologies and we are on plan to do that. On the attrition front, we have been working on a very narrow band of 1-1.5 percent over the last six quarters. This quarter we have seen an increase of 3 percent. Very clearly we had called this out earlier and there are three reasons for that, a) there was huge differentiated salary increase given, there have been disappointments, our performance appraisal process gets over and hence that also takes into account and traditionally Q1 we see people going for higher studies. So, all these three reasons put together has seen an increase but I think it is only for this quarter, next quarter you will see a decrease in attrition. So, the third piece which is happening in very clearly is on the automation side and you see that we have been focusing and we are releasing people at the bottom of the pyramid to do higher value aided jobs. So, a combination of these people getting redeployed and new requirements our hiring, re-skilling people for newer technologies very clearly we see utilisation has head space to improve further. We have improved by 2 percent this quarter and we see head space which for us is a clear lever from our margin perspective as we go ahead. So, overall I feel that the entire supply chain from a people standpoint, people supply chain you will see the strength continuing as we move forward. Q: How much is the head space in that case? Govil: We haven’t called out a number but if you compare, I have always said that we have a head space of 3-4 percentage point more to go up.Q: As far as attrition is concerned given the fact that this quarter was a seasonally weak quarter how much would you be able to bring down attrition next quarter?Govil: We don\\'t guide for but we have actually operated in a very narrow band and we hope to be back in that band very soon.Q: You were pointing out how the shift from energy or rather the wholesome focus on financial services, healthcare is now paying results. What are the levers that you are putting in place to brace from the volatility that is likely in the UK market thanks to Brexit? What are the other margin levers that you will have to put in place to brace from the kind of slowdown that you may see in BFSI?Neemuchwala: We have 27 verticals across all of our 6 segments that we report. What we have done is, we have made sure as part of the strategic theme on being able to mine clients and provide domain based consultative services. We have all the 27 verticals which are cylinders to our engine fire and that kind of in a way mitigates if we see softness in one vertical or the other which is the reality of business cycles and which will happen. So, same I would say for the banking and financial services vertical which has been working well. Even if there is a certain level of Brexit related slowdown that we see in the European capital markets area, our investments in North American banking and other places will mitigate that and hence all of this is incorporated as part of our Q2 guidance. Overall margin levers are the traditional levers that we have which you already know - offshore increase, utilisation improvement, span of control, all of those. The biggest margin lever that we see now is also the robotic automation. I am very happy that we started doing this early this calendar year and in Q1 we were able to go to about 56 customers where we did the robotic deployment. It is a very elaborate process where customers evaluate our robots, look at it from a cyber security perspective, look at it from the compatibility, from their IT governance perspective and then give us permission to be able to deploy that and that has gone very well.We have been able to release about 1100 and redeploy them into other engagements which essentially is a good margin lever. On top of it we have made a significant number of acquisitions and when these acquisitions come, they come with a cost model which is relatively different compared to what we traditionally operate in terms of our cost and there is always opportunity to apply some of our traditional levers in those cost models as well especially the low cost country delivery that we have expertise in and then bringing some of their engineering work on the platforms that we see looking at some of the integration of sales and marketing costs etc.So, there are a number of margin levers which we will continue to work on. We have not shied away from investments and that has brought down our margins in this quarter. We have a little bit of headwind next quarter again because of annual increase, 50 percent of that impact comes traditionally in Q2 for Wipro and these levers will be acted which will to a great extent mitigate that headwind and going into Q3 and Q4 it will be accretive to our margins.Q: So the full impact of the acquisitions could come in by Q3, Q4?Neemuchwala: That is right, the full impact of the operational improvements that we are driving and it will be an ongoing journey. However the revenue has already come in in this quarter in Q1 itself for all the acquisitions that we have already done. The margin improvement impact will come towards Q3 and Q4 as you mentioned.