See better Q2, H2FY16, growth from telecom: Wipro

IT major Wipro may have missed street expectations on its Q1 numbers reported today, but the management is confident of logging better results in the upcoming quarters.While Q2 will be better than Q1 and Q3, Q4 better than H1FY16, a caveat is announced soon- Q2 will see a significant headwind on back of salary hikes.Jatin Dalal, chief financial officer, says the company undertook the appraisal process in Q2 and that will have a decent impact on margins.The company's Q1 margin declined by 100 basis points (bps) to 21 percent during the quarter due to staff compensation.While chief executive officer TK Kurien refained from giving any guidance, citing SEC rules, he says the company is more than making up for pricing pressure by hiking productivity."Though we lost USD 200 million of energy base last year, 3.3 percent of growth, we expect to see growth come back in telecom and manufacturing verticles," adds Kurien.Below is the verbatim transcript of the interview.Q: You said that Q2 will be better than Q1 and Q3, Q4 even will be better than the last two quarters. Can I say in that case that with this entire fiscal numbers coming in better than expected by the end of this fiscal by FY17 you would be back to industry leading growth rate?
Kurien: The funny thing is I was answering this question in a very different way to someone before this. So, I was telling them I have two choices. One is that if I give full year guidance then I get bust by the SEC. If I don't give full year guidance I get bust by you guys.

Q: No guidance. FY17 will you be back to industry leading growth rate? Let us not put a number to it but industry leading?

Kurien: So here is what it is. So, what you would read is just this that in quarter two we will do better than quarter one, in quarter three and four we will do better than what we have done in quarter one and quarter two. That is all that I can say at this point of time because the minute I say something more than that what will happen is I will give out guidance and I don't give guidance. As a company we don't give guidance and we don't want to start right now.

Q: In that case is there better visibility right now as far as your client mining is concerned, as far as market share is concerned, are you seeing better visibility right now, are you better prepared to handle volatility right now as a company given the strategy you have been putting into place since the last three quarters than you were a year ago? Kurien: The funny thing about our business is that if you look at what's hit us in the business last year, it was energy. Just to give you a sense and this is a number that most people don't quite relate to, we lost USD 200 million of our energy base across last year and that is a pretty significant number. That has taken off almost roughly about 3.3 percent of my overall growth for the year for the full fiscal. So, that is a pretty substantial number and that happened primarily because of causes which were completely out of our control, oil price went down something that we did not anticipate, companies cut back we did not anticipate that and in turn it hit our topline and our bottomline. That we think is completely washed out, that is behind us. At the current oil price we believe we are going to have stability in revenue atleast that is what we see now and the interesting thing is that through consolidation deals we are actually winning over competition which is a positive. So, because we are gaining market share in energy, we think we are going to be in a better position to compete going forward, that is one big headwind which is out of the way. The second big positive for us is that healthcare business continues to grow, you would see the growth coming back this quarter. Manufacturing which has lagged for many quarters is going to start seeing growth coming back. Telecom had a muted quarter last quarter, we are going to see growth coming back this quarter. So, all those are positives and that's what really gives us this positive view of what Q2 is going to look like. Q: It may sound like glass half empty possibly but if i look at your margins since FY14 till date, you admitted that it is low this quarter because of the seasonal impact but since FY14 till date margins have gone from FY14 16 percent, FY15 between 18-22 percent and now it is at 21 percent. Yes your business model is completely different so i won't compare you to the peers but by when will you be able to say talk about 23-25 percent margin range? Dalal: I think the numbers that you mentioned were for the total business of Wipro Limited consolidated when we were existing in our earlier avatar when we had consumer care and others also as part of our business. If you see now in FY13-14 we delivered 22.6 percent, FY14-15 we delivered 22.2 percent. So, it was in a very narrow range performance. Our Q4 performance was 22 percent we have become 21 percent and it is predominantly investment in terms of merit salary increases, promotions and employee stock options. We had a tailwind of foreign exchange gain which we invested back into business in terms of some of the growth programmes which can help us improve our customer satisfaction and improve our client mining. So, overall i feel that we had a quite satisfactory performance in Q1. As we go into Q2 we have headwinds of two months impact of the salary increase because in Q1 we took only one month impact. We give merit salary increase from June 1. So, we have two months incremental impact in Q2. So, that is the headwind that we enter the quarter with and we will have to work with our levers on operating margin in terms of onsite offshore mix, utilisation and so on and so forth, so that we are able to squeeze sufficiently in order to mitigate as much as possible this headwind and that is where we will settle Q2 at. So, i feel there is ofcourse pressure on pricing in the market but we have sufficient levers with us if we are able to challenge our cost structure well enough that we remain ahead of that pricing curve in terms of managing our cost curve. So, overall it has been a satisfactory performance in Q1. We feel quite happy with it but we have to keep our eye on the ball and execute even better as we get into Q2. Kritika: Let me ask you specifically about the two concerned quarters. It has been a good quarter in terms of geography, in terms of vertical growth as TK was saying but healthcare and consulting have been a concern as you said. Last quarter in fact the visibility seemed strong in healthcare. So, what happened in this quarter and secondly what is going on with consulting. There was a statement made in the con call which I didn't quite understand that there could be some shutdowns in the consulting business, can you clarify all that? Neemuchwala: Let me answer consulting first and then I will come to healthcare. Consulting as you know it is quite a discretionary business and one of the things we are also doing as I take over the portfolio we are looking at the strategy in terms of what we want to do in consulting. So, there is a bit of restructuring that is going on to align with the strategy that we are driving for consulting. So, there are parts in consulting which are towards driving downstream revenue for us. So, digital consulting definition of customer journeys and stuff like that which creates then downstream digital development and engagements for cloud migration and so on and so forth. There is a strong consulting that we do in the infrastructure spaces. Fundamentally infrastructure services getting transformed for our customers. Again, cloud provisioning, infrastructure service as we have said and how customers manage and provision and consume that infrastructure is a big consulting area. Then the traditional IT architecture and technology consulting piece and then the process consulting which is process governance and all of those. So, those are the areas we are going to focus on. And on the domain side, the industry vertical domain as well as the functional domain. These are the areas broadly that we will do in consulting. There are some other parts which have been executed in consulting which may not necessarily all belong into consulting which we are putting it in places where they belong. So, the business doesn't shut down or go away, it is just the consulting focus is on the value side of the business and wherever there is downstream volume side of business which is better than within individual services lines is being transferred there. Kritika: There is no shutdowns as such? Neemuchwala: No, there is no shutdown as such. This is part of the overall delivery realignment that we have initiated recently. On the healthcare side it is just a quarter issue. There are certain large engagements which got over and then there are certain engagements which we have won already but we were expecting to start but we have not started yet. The signing and other things have taken time. So, it will start in the next quarter. We are almost on track to start in Q2. So, it is just a one quarter issue on the healthcare segment. Kritika: Utilisation is very strong this quarter, attrition seasonally high. You have given a wage hike as Jatin was saying, promotions have been given out, by when will you be able to contain attrition, probably bring it down to the comfort range of 11-13 percent which most players would like to operate in and also is there further room for growth as far as utilisation is concerned? Govil: Let me try and give you a full picture on our entire supply chain. If you look at it good net adds, 3,500 people. Utilisation if you see over the last three quarters have been going up and we are very confident that we have headspace to make it even better. So, there is absolutely no issue there. Coming to attrition, attrition again seasonally it is a quarter for us because we do our appraisal cycle and we have people who go off for higher studies but if you look at six quarter, I am not talking of one or two quarters, six quarters it is played in one percent band. So, it is very predictable, it is in a very narrow band and helps us plan the business better. So, if you look at the entire supply chain, from hiring adds, the utilisation as well as attrition it is a pretty robust performance as we look at it and the initiatives and the interventions we have done which are in a - you spoke about the wage hikes and promotions and equity to leaders and all that, all will only enable us to make it better. But in our business it is about becoming more predictable about how we manage this and that is what we have been able to do this well. Obviously I am not saying we would like it to be a little lower and we have a focus on people with right skills and high talent and high performers these are the two areas where we keep our focus on but otherwise we are fairly comfortable at the way that attrition has panned out over the last six quarters. Kritika: Is there further scope to growing utilisation? Govil: Absolutely. We have huge headspace to look at it. Kritika: What is the headspace in that case? Govil: We are seeing that number. Like revenue no guidance, like margin no guidance, utilisation also no guidance. Kritika: So, yes it has been a concern. You are probably the first person to admit in the IT industry that yes, pricing has been a concern, there will be pricing pressure and there is right now. Clients as you said are consolidating that is reflecting into pricing pressure thereby reflecting into margins. What are you doing right now. In the next two to three immediate quarters what are you doing to be able to contain that pricing pressure that is evident in the traditional side of the business, not in the chain side? Kurien: Let me explain what is happening and how the scenario is playing out in the market place because that will give you a sense of why pricing pressure is happening. If I look at the run side of the business and if I go back say two years out into 2013-14 80 percent of the deals that we competed for in the run side of the business were with global majors. This year 60 percent of the deals that we are competing with are with global majors which means that Indian players have now come to 40 percent of the total portfolio. Those are the guys we are competing with right now when they go up for renewals. When you compete with an Indian player they have the same cost advantage that you have. So, really to remain competitive and to keep your margin where it should be you really have to drive differentiators in terms of hyper automation. That is the only lever that you have. Last quarter what we have done is we have implemented our platform homes across the board. We have got 70 projects running on it, we have released about 1000 people approximately, give or take a 100 out of our current project base and redeployed them into other projects. So, that is the kind of core of productivity that we are seeing there. So, while we see drop in terms of pricing this should have been made up by productivity.