Wipro Ltd (WIT) 2014 Q2 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Wipro Limited earnings conference call.

(Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Manoj Jaiswal.

Thank you and over to you, sir.

Thank you, Inba.

Good evening and good morning to all of you.

A very warm welcome to all of you to our quarterly earnings call.

We will begin the call with business highlights and overview by Mr. T. K. Kurien, Executive Director and CEO; followed by financial overview by our Executive Director and Chief Financial Officer, Mr. Suresh Senapaty.

Post that, the operator will open the bridge for question-and-answers with the management team.

We have the senior management of Wipro present here to answer all your questions.

Before Mr. Kurien starts, let me draw your attention to the fact that during this call we might make certain forward-looking statements within the meaning of Private Securities Litigation Reform Act 1995.

These statements are based on management's current expectations and are associated with uncertainties and risks, which may cause actual results to differ materially from those expected.

The uncertainties and risk factors have been explained in detailed filing with SEC of USA.

Wipro does not undertake any obligations to update forward-looking statements to reflect events and circumstances after the date of filing thereof.

This conference call will be archived and the transcript will be available on our website, www.wipro.com.

Ladies and gentlemen, let me now hand it over to Mr. Kurien.

Good morning, everyone.

I'm happy to announce the results for the second quarter of fiscal 2014.

We have had a dollars revenue sequential growth of 3.2% in constant currency for the quarter.

Last quarter, I had mentioned that we're seeing improvement in spending and momentum in deal closures.

Over the quarter, we have seen that discretionary spend continued to show a steady pickup and our deal conversion rates have gone up.

We see broad-based revenue growth across verticals.

We have had the highest revenue growth over the last seven quarters.

All our verticals have grown sequentially in quarter two.

We have likewise seen broad-based growth across customers, the Top 10 grew 4.1% sequentially and Top 125 grew 3.6% sequentially.

Two accounts have crossed the $200 million run rate in the last quarter.

Account management continues to be the key area of focus.

Our strategy of deepening focus in the Top 125 strategic accounts started delivering results with growth rates higher than the broader organization.

Overall customer satisfaction scores continue to improve, up 4.1% compared to the previous quarter.

We see three priorities for the organizational level.

At the customer front-end, digital transformation is a key priority for ensuring a consistent user experience through a variety of channels.

We have mitigated our capabilities from consulting applications analytics to enable our end-users identify, sell, and service through a connected experience across multiple task points.

We have delivered solutions leveraging this approach with three critical engagements.

The area where we see increasing focus is in leveraging open source platforms, which are going increasingly mainstream.

We are bringing together open source innovation and our deep understanding of enterprise business needs to help our customers innovate and transform.

In the execution space, we have been investing in multiple initiatives over the last few quarters to drive productivity through process changes and tools.

We have formalized this in a proprietary platform that we call ServiceNext that uses machine learning algorithms and hyperautomation to drive much higher levels of transparency in operations and cost savings.

The response has been good.

We have seen two significant wins using ServiceNext in the last quarter.

On the peoples front, we are driving a cultural shift towards putting customer value at the forefront and accordingly ensuring greater empowerment and quicker decision making.

If you look at our verticals, two verticals have done outstandingly well over the past quarter.

Healthcare has led with a constant growth of 6.4% and media and telecom has led with a growth of 5.6%.

I want to conclude by saying that our strategy has started delivering growth in the front-end and in execution and we remain focused on driving further on our strategy.

Thank you.

Good day, ladies and gentlemen.

Before I delve into the financials, please note that for the convenience of readers, our IFRS financial statements have been translated into dollars at the noon buying rate in New York City on September 30, 2013 for cable transfers in Indian rupee as certified by the Federal Reserve Board of New York, which was $1 equal to INR62.58.

Accordingly, revenue of our IT Services segment that was $1,631 million or in rupee terms INR100.68 billion appears in our earnings release as $1,609 million based on the convenience translation.

Total revenue for the quarter was INR109 billion, an increase of 19% year-on-year.

Total net income for the quarter was INR19.3 billion, an increase of 28% year-on-year.

In IT Services, our revenues for the quarter September 30, 2013 was $1,631 million; sequential growth of 2.7% on a reported basis and 3.2% on constant currency.

IT services operating margin have shown strong growth.

Our sustained execution towards increased operational efficiencies in the business coupled with currency benefits has offset the impact of wage hikes resulting in margin expense improvement of 250 basis points.

Pricing environment is stable, but newer deals are competitive.

Customers are seeking cost savings and not coupon-based discounts.

On the exchange front, our realized rate for the quarter was INR61.73 versus a rate of INR56.26 realized for the last quarter.

As of period end, we had about $1.7 billion of outstanding ForEx contracts.

Our IT products business grew by 15% on a year-on-year basis.

The imported business growth can be lumpy and margins were impacted due to the rupee depreciation making imports more expensive.

The effective tax rate for the quarter was 22.9% as against 20.7% in the previous quarter.

This is a more normalized ETR compared to the previous quarter.

In the quarter we generated operating cash flow of INR17 billion, which was 89% of the net income.

We generated a free cash flow of INR15 billion, which was 80% of the net income.

We'll be glad to take questions from here.

Thank you very much, sir.

(Operator Instructions) Moshe Katri, Cowen.

Nice quarter, guys.

Can you start by talking about the different factors that benefitted or impacted margins during the quarter; the FX benefits, the impact from compensation increases, et cetera?

Moshe, this is T K. I'll take a shot at it and hand it over to Jatin if you have any further questions.

Fundamentally, what's happened is there's one headwind that we had going into the quarter, which was the wage increase.

So we typically give our wage increase on the 1st of June so last quarter we absorbed one month of that and the quarter that just finished, we absorbed two months of that impact.

We negated that entire impact through operational improvements and we had a foreign exchange positive.

That's really what kind of resulted in the operating margin going up.

And can you quantify the positive from FX?

So Moshe, it's really ForEx gave a benefit of 2.5% and operationally we mitigated out the impact of salary increases.

Okay, understood.

And then in terms of some of the different segments, I've noticed that Europe underperformed some of the other regions at least in terms of constant currency sequential growth, can we talk a bit about that?

Was it a specific geography that underperformed and can we expect an improvement there and then same thing looking at the BPO part of the business?

So as far as Europe is concerned, I wouldn't call it as concern, I would just say that it's a quarter aberration.

Overall as far as Europe is concerned, we see demand coming out of UK, pretty strong demand.

Continental demand is mostly around -- it's very, very specific to a couple of areas; a lot of work happening around infrastructure and on application management.

Those are the two areas so therefore which has got a cost focus, it seems like Europe business is still doing well in that particular area where the cost focus is a little high.

But I wouldn't read too much into it because if you look at the year-on-year growth, it's running at 8.3% for Europe.

Okay.

That's fair.

And then out of the 45 new clients, can you quantify how many were European based?

Yes.

So Moshe, we had roughly one-fifth of those new clients came from Europe.

Okay, great.

And then final question, attrition spiked a bit higher during the quarter, can you talk a bit about that?

Saurabh?

Hi, I'm Saurabh here.

So attrition at the quarter standpoint has gone up by about 2 percentage points, the voluntary attrition and the customer range of 13% to 15%.

That is driven by two reasons.

One is I think it's driven by people going on leave for further studies and the second one is on people because of our salary increases in the last quarter, the differential which it created, some people moved on that.

But otherwise, overall we are comfortable with this range of attrition.

Alright, great.

Thank you for the color and great execution.

Edward Caso, Wells Fargo.

Good evening.

I was wondering if you could give us a sense for Wipro's approach to the infrastructure management space.

How you differentiate and are you seeing any change in the competitive posture out there?

Thank you.

Ed, this is T K. I'll take that question.

So there are a couple of things that we have seen very, very clearly on the infrastructures space.

Number one is that if you look at the competitiveness, it's getting very, very competitive so price is becoming a big game there.

The second thing that we are noticing is that in nearly every element of infrastructure we sell, cloud in some form or shape is a very, very key component.

So to that extent, what we did not see maybe two years ago was cloud-based services being part of an overall solution.

We are seeing that more and more, in fact we are seeing it in every case.

We are also seeing considerable demand coming in from the data center side of the business, end user computing we are seeing a very, very different play out there especially driven by virtualization so it's a mix.

But today when people go and outsource, they fundamentally look at the whole thing right from end users, back into networks, and then service.

Are you taking on the hard assets or are you mostly working the services side of the equation?

It's mostly the services side of the equation.

There are some aspects of that that we do in the India market, but more often than not we sort of back with the bank where banks take off those hardware rather than we carrying on assets though there'll be some selectively where we could be carrying on.

Yes, but on the strategy we'd like to remain light.

Immigration has gone quiet in the US, the debate it may be revived here shortly.

But what steps has the Company taken if any to reposition themselves for any increased headwinds on immigration rules?

So clearly I think the representation that we have been doing through USIBC, directly through our government advocacy offices, and through the Government of India and other industrial associations including (technical difficulty) organization being very supportive on this; matters have been taken up.

I think there is a decent progress that has happened in terms of the house bill becoming more acceptable where there is some other corporate support initiative has become more supportive of the house bill.

There are one or two positions in that, which has also made a moderation.

So to that extent, I think we will write these off [rates].

We are trying to bring it to the attention including meeting varieties of people who have influence on that.

But at this point in time, all we can say is definitely we are closely monitoring it, trying to see what are the improvements that can happen on that.

And we're also working with our client organizations to see if and when if some of those provisions stay, how do you mitigate that in terms of the revised working arrangements.

Great.

Well, thank you and congrats on a solid quarter.

Ravi Menon, Centrum Broking.

Gentlemen, congratulations on a great quarter.

Just looking at your legacy portfolio and how you've changed that both in terms of verticals and services.

I would like to get an idea of how do you like this shaping up over the next two or three years both in terms of the verticals as well as services.

Ravi, I'm very sorry, I lost you in the beginning.

Can you just repeat that once again?

This is T K.

Yes.

I was saying that I saw you on TV talking about how in the network equipment manufacturers side, you've gotten down the reliance on revenue on that part.

So I was wondering how you want to shape up your customer portfolio and your services portfolio in the next two, three years.

So would you be looking at say more in ADM, more in infrastructure, BPO in the service side; and in terms of verticals, I mean are there any specific verticals which you expect to be more dominant say two, three years from now.

So here's what we have done, Ravi.

When we laid our strategy a couple of years ago, one of the big things that we said is that certain verticals where we absolutely want to be really known in the market.

So if you look at our portfolio today and if you look at banking and financial service as an example, banking we were always very underweight on Europe.

Today we believe that most of the customers, at least the big customers, in Europe are customers of ours and that's been a big shift over the past couple of years.

We have really gone after customers in a particular segment, in a particular geography, and made sure that they all form part of our portfolio.

Along with that, there are two areas that we believe are critical and I'm just talking about banking and it will give you a flavor of what we are doing in other verticals.

If you look at banking, there are five areas where investments are going to happen in banking.

One of them is going to be digital, the second one is going to be around payment systems, the third is going to be around analytics, the fourth is going to be around infrastructure, and the fifth is going to be around compliance.

Fundamentally for us, given the fact that we were late starters in this game, I think the biggest opportunity that we have is to go after these segments and differentiate offering and that's exactly what we have done.

So will ADM go up, will AM go up?

Frankly to me, that's not a very important question.

I think there is enough play of infrastructure in banking, there's enough play in bringing all the different service lines together for a unified digital experience especially in a bank, there's enough work to be done in bringing domain and analytics together for risk management.

So each of these will not be the traditional ways we have looked at it in terms of service lines, it will be more holistic and integrated solution so that's the way we are going.

And once we sell a solution, the AM revenue in most cases naturally follows.

So our capture rate on solutions that we create and sell that is on AM revenue can be as high as 70% to 80%.

Sorry, I lost you on the last bit.

What did you mean by the capture rate?

Once we sell a platform, we design a platform and deploy it, the application management revenue on that; 70% to 80% that gives when we capture the applications management revenue that follows.

Okay, great.

That sounds good.

And anything specific on Europe?

Year-on-year you said there was 8% growth, is Europe going to be a more significant driver of growth going forward do you think or is US going to be the major driver?

Look, here is the game.

If we don't win in the US, we fundamentally lose the world.

It's that simple as that, there's nothing complex about it so we have to absolutely win in the US.

Europe could be important for us, we'll continue to push for growth there.

But I think the fundamental strategy of the Company calls for growth in developed markets.

Developing markets what we have found over the past few years is that it is fairly transitory when you get into developing markets, you may have a great year in one geography and a crazy year in some other geography.

So net that in balance while they show growth, it's not necessarily the kind of growth that you would like to have over a long term because of volatility.

Thank you.

I appreciate the answers.

Joseph Foresi, Janney Montgomery Scott.

My first question is what's driving the return of the discretionary spending and how sustainable do you see that?

So there are a couple of things that we are seeing and by industry I'll kind of break it out.

If you look at our segments, there are some segments where capital spending continues to be more secular so what happens is that whether you like it or not, people will continue to spend money primarily because the investment cycles last anywhere between zero to seven years.

If you look at oil and gas, that's a classy example of a business where investment cycles last for a long period of time.

The second thing that we especially in the US is we're seeing US discretionary spending surprisingly coming back.

Now it's a little early to say whether the fiscal cliff issues have had any impact on discretionary spending and would that impact year-end budgets, but overall right now we don't see too much of an impact.

So from our own perspective, we see discretionary spending continuing in the US.

And this is quite broad, if you may, it's not just one particular industry and if you look at the play, it's mostly around the digital side.

Our (inaudible) analytics two years ago has now kind of quietly morphed into digitals.

To that extent, we see that happening on a fairly regular basis.

On the run side of the business, we see infrastructure continuing to be a big play.

If you look at constant currency, our infrastructure business has grown 5% sequentially over the past quarter.

The trouble spots for us where we have to get our growth engine moving continue to be BPO where we have to do something very different out there to get growth back there.

But as far as infrastructure is concerned, as far as application management is concerned, and what we call business application services which is our entire application suite; our performance in the last quarter has been pretty decent.

My second question is I think you've seen a pickup in media and telecom, they performed well; but we've had I guess or we've seen some structural issues with telecom in the past.

How are those challenges taking place, how are they playing out?

Should we expect more out of media and telecom going forward?

Are you still facing those structural challenges in telecom?

Ayan Mukerji, who runs our telecom business is there and he can talk through specifically on what he's seeing in the market.

Joseph, this is Ayan here.

We continue to see the market being challenged.

I don't think there is any fundamental change as far as service providers or the equipment providers or media business is concerned.

That's one.

But if you remember our strategy for the last two quarters, obviously we are seeing the revenue impact this quarter for deals won over the last couple of quarters.

Our intent as a team has been to improve our deal win ratio and improve market share so our focus has been on making sure we win account wise our share of the market.

And as T K mentioned earlier on, we did not have much of discretionary spends nor were there very many transformational spends.

So again, our focus has been and continues to be deal win and account based and we hope to continue seeing this kind of momentum.

Apart from the fact that we have holidays coming up in quarter three and not accounting for all of that, we continue to see growth in this business.

Okay.

Last question for me.

I know you guys eventually are targeting probably a move back to industry growth rates at some point.

Have you seen a shift in the market share that you're taking at specific client accounts and maybe you could remind us of what the time frame is of getting back to those industry market rates?

What we did when we articulated our strategy was the 125 accounts that we went after.

Now broadly in the 125 accounts, we have seen a very clear market share gain.

Overall in terms of growth, the question of when do we get back to industry growth, I think the answer would be towards the back end of the year and our year ends on March 31.

Going into next year, our own sense is that we should see growth back to where we'd be comfortable with.

Sandeep Shah, CIMB.

T K, firstly congrats on the good execution.

In terms of the deals which have been won in this quarter, can you throw some light in terms of the TCV of deal momentum on a QonQ basis, YoY basis?

And also in terms of the number of deal wins, has it been stable on a QonQ because last quarter we had a good win?

So overall we don't break out number of deals, but let me just give you a sense of where we are, Sandeep, on overall as far as deals are concerned.

Last quarter what we have seen is we have seen our win rates improve and we have seen number of deal closures improve.

So to that extent, quarter two has been better than quarter one.

Okay.

So you mean to say both in terms of TCV as well as number of deal wins?

Absolutely.

Okay.

And secondly, if I look at I think this quarter with the realized rate being lower than the average portrayed for the peer, there could be hedge losses which would be sitting above the EBIT line so that the actual margin on the EBIT level could be even higher than 22.5%.

So can you throw some light how much negative impact which was there in the hedging loss on the margins this quarter?

When we do the computation of the margin, it does take into account mark-to-market profit or losses.

So we do the EBIT line as well as whatever is reflected in other income lines, we consolidate and put it into our segment reports.

So therefore, it does take into account the entirety of the exchange impact it had on the profit and loss account.

Okay.

But is it fair to say that if we do the accounting on a spot basis, the margin could have been higher than 22.5%?

No, I won't say so because other income is a gain and therefore that has also been factored into, when we talk about, the 22.5%.

Okay.

And going into the coming quarter, the hedge rates are improving on a QonQ basis?

I'm sorry.

Going into the coming quarter, the hedge rates are improving on a QonQ basis?

Well, we saw our OCIs at about INR450 crores.

And just last question.

T K, I think there was some announcement in terms of the reorganization changes in some of the verticals as well as in the service lines.

So do you believe there could be some amount of impact in terms of conversion of deals or in terms of a transition?

Not at all.

In fact what we have done is pretty simple if you go back and see what we have done.

The first big focus has been that wherever we have business units, we believe that people who run our business units should sit in the geographies.

And to that extent, if you look at BSFI, our greatest area of opportunity today is North America and we have Shaji sitting there.

And our biggest area of opportunity right here for us is in our backyard in India and Middle East and Soumitro sits right here in Bangalore and he's going to run both those.

So really what we have done is the realignment as far as it has happened primarily to make sure that we align our people with opportunities.

If you look at our GIS Business, G.K. Prasanna who used to run that for many years who in many ways started that business is running the business now.

To that extent, there is no noise in the system as far as people changes are concerned.

These were guys who have run these businesses in the past, they know their customers well and to that extent, we only see opportunity.

We don't see a [downtrend].

Okay.

I have a follow-up.

I will come in the follow-up round.

Thanks.

Yash Mehta, Equirus Securities.

There were some four deals in this quarter that you mentioned, could you give us an idea of how many of these would be for existing customers and how many of these are new?

Can you repeat the question?

We couldn't hear it properly.

For the four deal wins that you mentioned, how many of these would be for existing customers and how many of these would be for new customers?

So I would say there is a good balance there, we have not broken that out.

Okay.

And anything further you could give us on the annual run rate or TCV or anything?

Sorry.

Anything you could give us in terms of the financial side of these deals?

We do not disclose the financial details about the deal, but they are good deals which give us a good steady state of revenue as we get into just next quarter and quarter after that.

Alright.

Thanks.

Diviya Nagarajan, UBS Finance.

Just a follow up to your earlier question about improving deal flows and revenue run rate.

So is it fair to assume that from here on you expect to be on an improving your year-over-year growth trajectory in terms of revenue?

So Diviya, overall we have given the guidance for quarter three and I don't want to even guess as to what the full year is going to look like.

But just to give you a sense, there was a strategy that we had put in place and fundamentally what we are doing is executing to it.

So don't read the quarter as a big surprise.

We are just executing to our strategy and fundamentally we have a sense of when we're going to catch up with industry growth and to that extent, I think we are pretty much focused with deals executing to that.

Okay.

But we have seen in this quarter and you've also guided for a fairly decent growth momentum next quarter, I'm trying to reconcile that with your hiring numbers.

You seemed to have seen pickup in attrition, pickup utilization, and you have a flattish headcount number at the end of the quarter.

Is that the function of the fact that we expect to juice out utilization and binge a little more from your own or do you expect to see this pickup?

I'm trying to understand is there enough capacity in the system to target better than expected fruit if the market should pickup in the next year?

So let me pass back the call on to Bhanu.

He can give you a sense of what's happening both in terms of growth as well as in terms of the opportunity of the head space that we see in terms of utilization.

Diviya, this is Bhanu.

One of the things you would have noticed is that constantly every quarter we have been talking about how we will do analytics based productivity improvements for our major services and that continues to be the focus for us.

And again this quarter, we have done some good improvement with respect to the productivity based services for our major services and obviously that leaves us capacity for future growth for our people.

The second area that we are focused on heavily is in terms of ensuring that the skill sets for our teams are current and what are the skill sets required for the future deals that they are pursuing.

So the amount of training that we are doing for our teams like that itself is again giving us supply for our teams.

So between these two, you would continue to see our focus on productivity and we'll continue to upgrade the team's skill sets for the future skill sets that we are seeing.

Thanks.

All the best for the rest of the year.

Trip Chowdhury, Global Equities Research.

Again, very solid execution.

A couple of questions.

T K, you did mention that you are seeing customers and implementations more on open source platforms.

I was wondering can you highlight a few platforms because we always thought only it's Linux, but probably it could be more than that.

And also on the same thought, are you having the same pricing structure for open source platforms versus SAP or Oracle implementations?

So I'll get Bhanu and K.R. Sanjiv to talk to a little bit in terms of what we are doing on open source.

On the pricing front, surprisingly what we are finding is that our realization on open source is probably higher than what we get in [RSL] platform.

So Sanjiv, Bhanu?

One of the key areas where we see open source getting traction is in the data space.

So we see a lot of our customers interested and starting initiatives in deploying platforms like Hadoop, Cassandra, and a lot of Hadoop family based solutions within the IT space.

We see a lot of pilots today.

We also see a potential of these open source technology platforms to scale up and really be a large initiative within the data space going forward.

We also see a lot of integration tools playing in this space so a lot of product vendors have come out and started replacing and providing value in terms of bringing together various data sets and source systems to destination systems and we see a lot of products like Talend, et cetera playing in that space.

We also see some very critical, very influential open source products like System R, which are making inroads into the analytical space, the core statistical modeling space and we see a lot of customers interested and a lot of projects getting kicked off in that space.

These are primarily where we see potential for open source and fair adoption happening today.

Perfect.

I was just wondering like if you look at Hadoop, there are various companies who have commercialized it like Cloudera, Hortonworks, MapR.

Do you think it makes sense for a IT services company like Wipro to also probably take the raw bit from Apache Foundation and then certify it as Wipro Hadoop?

Will it make business sense or probably not?

And that's all from me.

Thank you.

What we are doing is basically looking at some of the players who are actually doing that in the marketplace, people like Hortonworks and Cloudera, we think they are in the best position to take that road.

What we are doing as an organization is to build on top of that.

So the proprietary releases or the customized or the specialized releases from these vendors, how do we harden it to make it more enterprise level data warehouse kind of platform.

That's what we are focusing on and I believe that's where we would bring in value not doing the core, owning the releases.

Trip, the maximum amount money that you make is when customers want you to customize stuff.

You make more money in that part of the business rather than working on the core.

Viju George, JP Morgan.

Good evening and congratulations to the management.

Two questions.

Your sales and marketing expenses have increased for a bit now yet your sales and support staff has declined in count for the past couple of quarters sequentially.

I guess it goes back probably to the profile of people you are hiring, but if I could just understand why the sales and support's headcount had declined in the past couple of quarters.

Jatin, can you answer that?

Viju, Jatin here.

Our sales and marketing spend has remained flattish at about 7.1% between Q1 and Q2.

What you are seeing is a reduction in G&A expenses because G&A is mostly rupee based and since the realizations have gone up because of the higher rupee conversion, it is giving the natural operating leverage of the G&A expenses.

Now to the question of sales and support headcount, if you see over last three quarters, we have remained fairly in a very narrow range and any variation there are driven more by quarterly attrition versus hiring numbers as against a focused anticipated move.

And that number as you see is the total number and not really only the sales number, sales component of that number is much lower as you would appreciate.

And more or less flat.

Yes.

One more question, if I may.

If I look at where your growth has been driven in the past couple of quarters, my sense it's come more from India and emerging markets particularly on a YoY basis, I'm looking at on a YoY basis.

It seems to me that the US as a portfolio is pretty much struggling still on a YoY basis.

So clearly while you've driven market share gains and growth in the emerging markets including India, the US which is the largest market is something where Wipro seems to be (inaudible) a lot of work from a geographic perspective.

So Viju, there's no doubt about the fact that we need to do much more work in the US, okay.

I don't think we can duck that, that's the reality and we have a strategy in place to do something about that.

As far as India and Asia-Pac are concerned on why the numbers are looking much better, it's to some extent the billing that we do for our global customers.

For a global customer who sits in New York, if we bill to Singapore; it comes as Asia-Pacific revenue for us, it doesn't come as US revenue.

And some of that has impacted, Viju, when you look at YoY numbers on US versus Asia-Pac.

And having said that, I think we have had good revenue growth in Australia as well as in rest of Asia-Pac so that is not to anyway dilute that.

Sure.

Thank you.

All the best.

Ashwin Mehta, Nomura.

Congrats on good execution.

I wanted to get a sense in terms of how sustainable do you think the current margin levels in IT services are, what are the headwinds or tailwinds that you see to the margins near term.

And my second question was on cash flows.

If you look at the cash flow from operations for the first half, that's down on a YoY basis.

What exactly is depressing that and are we seeing a trajectory shift in terms of unbilled receivables and other assets or prepaid expenses?

So let me answer, Ashwin, both the questions.

So let me answer the second question first.

The last year number, which is in rupee terms INR30,617 million, that includes the erstwhile businesses which were demerged from Wipro Limited.

And if I adjust for that, that number would be lower by roughly INR336 crores or INR3,360 million and to that extent, you will see that there is an actual YoY increase on that number by upwards of 10%.

And Ashwin, can you come back on your first question?

The first one was in terms of how sustainable do you think the margins are at these levels in the IT services space and what are the headwinds or tailwinds that you see on the same.

So Ashwin, if you recall, we have maintained that the organization focus is on getting the growth trajectory back.

And in our business, growth itself yields many operating margin levers favorably such as utilization, such as ability to deploy the younger staff at the bottom of the pyramid, and so on and so forth.

So our focus remains growth.

We have maintained that we will focus on execution as we said in Q1 and as we said in Q2 and some of the benefits you are already seeing in Q2 results and we will continue to remain focused on execution, but that execution would be led through growth.

Okay.

Fair enough.

And just one last one, what are the tax rate expectations for this year and the next?

As usual it will be plus or minus 2%, Ashwin.

Okay.

Thanks a lot and all the best.

Sandeep Muthangi, IIFL.

Great quarter.

This quarter is very broad based when I look at the service mix also; but still these two services, ADM and BPO, continue to have a fairly weak performance.

T K, you touched upon BPO being a problem spot.

Can you highlight what's happening over there in terms of your strategy of improving the growth because even in the past we had a few false starts with the BPO?

Also in the ADM part, you said that discretionary spending is improving and you sounded more positive on the maintenance piece over there.

Should we see growth rates improving in the ADM piece going forward?

Sandeep, Jatin here.

If you really see, the growth in ADM has been in a similar trajectory for several quarters.

We see some of the growth coming back in the ADM space and to that extent, yes, we feel a little more positive and confident about some of the work that we'll do on application space.

But one has to realize that that's the oldest service line and the growth is really led through the service lines like infrastructure, BPO, and the newer service offerings such as AIM and mobility.

So you have to see in that context, but there are deals in the marketplace where we are winning and therefore it's not a space that we are letting go in any space as an industry not just as Wipro.

But there are inherently lower number of deals there and therefore you will see that part of your portfolio will not grow as fast as the rest of the portfolio.

Right.

And what are your comments on a strategy for the BPO going forward?

So BPO, there are a couple of things.

If you look at the way we think about BPO, our view is ultimately the biggest growth in BPO would come through managing a stack end to end.

When I say managing a stack end to end, what I really mean is ultimately what has happened is applications and BPO could both go together either as a utility or as a separate service, it's not about (inaudible).

That's the real focus for us.

Doing more and more BPO, which is basically back office work or any other work where we are using labor, while it may give us a big bump up on the topline, it doesn't give us sustainable margin and that's the worry because labor by itself can get commoditized very, very quickly.

Now in terms of growth in the next couple of quarters at least, we don't see hyper growth coming back as far as BPO is concerned.

We see that happening probably next year and towards the latter half of next year.

Okay, great.

Just one quick question on the whole attrition angle, I think a few questions have already been asked on that.

But if I look at the involuntary attrition, it's been spiking up for quite some time now.

It's inched up from say 1.5%, 2%-odd two years ago to nearly 5.5% this quarter.

How should we be interpreting this number?

Sandeep, this is Saurabh here.

Sandeep, we do our annual appraisal cycle beginning of the year and we had anticipated that we'll take those measures of exit of people on performance ground in Q1 and Q2.

So we had anticipated some and as you go to future quarters, you'll see a dip in this number.

That's what we are looking at.

Okay.

Thanks for the clarification.

That's all from my side.

Nitin Padmanabhan, Espirito Santo.

Two questions actually.

One was with regard to margin.

I think for almost the last eight quarters, you have done a lot of work in terms of improving productivity.

Your FPP percentage has gone up quite a bit as well and when we look at the last year, it looks like you have reinvested some of that into S&M.

I just wanted your thoughts about how one should look at this going forward.

Do you think that the benefit from those operational efficiencies will be more visible in margins or would you reinvest them?

So I'll get Bhanu to answer that.

Bhanu, if you can answer that.

But I think Jatin alluded to this; really for us to improve our margins, while we can do a lot of work around operations, the benefit of that will be incremental.

The real big bump-up we would get is only when the topline starts moving significantly.

Having said that, I hand it over to Bhanu to get into a little more detail.

So Nitin, with respect to productivity improvement, we'd continue on that journey as you would have seen.

As you said, last four quarters you would have seen the same kind of momentum on the productivity improvement.

The investment into groups will continue.

There is analytics based [operations] that we've done for some of the major services, T K referred to that in the call with the ServiceNext platform that we have done.

We'll continue to roll that platform to all our existing engagements as well as include them on the future engagements for getting the right levels of productivity.

So the cost of delivering all major services will continue to be focused on reducing the cost of delivery products and that in itself gives us capability for training our people to different kinds of skill sets as well.

Sure, great.

Just one more question, if I may.

The R&D business seems to have done extremely well.

Just wanted to understand the underlying trends there.

Does it look like a secular trend?

Anything that you're seeing qualitatively in the marketplace that's driving this?

So I can ask Jatin.

Jatin, if you can answer the question.

The R&D business comprises of two elements for us, the work that we do in our product engineering segment and if you see product engineering segment after a few quarters has really turned around and is one of the fastest growing service lines growing ahead of Company growth rate in the current quarter so that has helped the R&D business.

And also the fact that some of the work that we perform in the nature of R&D is part of our GMT where also we have had an uptick led by a couple of brand assignments and that has helped the R&D business.

So I think the good indicator to look at R&D would be to look at PES and GMT growth.

But do you see trends within PES that suggests that spending is improving there and this looks like at least sustainable for some time on the PES side?

There are a couple of things that we see as far as engineering is concerned.

I'll speak very specific to PES.

If you look at our PES portfolio, we are very much overweighted to the electronic segment.

What we need to do is balance our portfolio a little better and get on to the mechanical side and that's what we are pushing towards because growth today; electronics is very bumpy in terms of revenue.

There are some quarters where you will have (inaudible) revenues and some quarters where you're sitting in the dump.

To balance that portfolio out, you need to have more mechanical engineering and electrical engineering base level product development which will really help us.

That's the end of it.

Right now, we've not seen PES slowing down very suddenly.

We see growth continuing, but we have to diversify our portfolio long term for us to get end result.

Sure, great.

Just one last one, T K. I think you had mentioned that we have already done a lot of work, but there's a lot more that needs to be done.

Just wanted to get a sense of what are the key priorities where you think really needs significant improvement and over what period do you think you should be there?

I'm sorry.

Can you just --.

Key priorities.

Was the question on key priorities for the business?

No.

You had earlier mentioned that in terms of the work that's been done over the last two years, a lot of it has been done, but there still seems to be a lot that needs to be done.

I just wanted to get a sense in terms of your priorities in terms of what needs to be done in the immediate future and how you think that would benefit the overall organization in terms of revenues and margins.

I think most of the work that we have to do today is on the market side and I think what we've done over the past couple of quarters is that we've managed to improve our account management.

Our hunting pipeline still not where it should be.

It's improved significantly, but still not where it should be.

So to that extent, I mean if you look at our percentage of revenue that we get from hunting every year, that today would be about between half to one-third of competition and that's the gap that we need to [close].

Sure, great.

Thank you so much.

Pankaj Kapoor, Standard Chartered Securities.

Good quarter.

Jatin, can you just help understand how we have got this ForEx gains above the operating line despite the fact that there would have been some hedge losses in the topline?

So the way to look at it is that you would have the gains and the losses which would be sitting in separate lines across the P&L.

And the way we look at it as we look at a single revenue realization as part of our segment report and if you see that number, this quarter was INR61.73 and that reflects a 2.5% operating margin benefit that we spoke about compared to the previous quarter.

So my request is not to look at one individual line in the P&L and try and infer ForEx.

Look at the overall realization rate that we are seeing in the segment report and compare it with the previous quarter and see the margin benefit that has flowed in the current quarter.

Okay.

So this ForEx losses that we have reported above the operating line, that is excluding any hedge losses that you would have had or that is inclusive of the hedge losses?

No, that is excluding the hedge losses.

Some of the hedge losses are part of the revenue stream so therefore what you are seeing a negative number in cost which is actually a gain and there is a corresponding loss, which is coming as part of the revenue line.

And if you net out both in the segment report, you will see our total revenue that is after taking into effect both the impacts.

Okay, fair enough.

Thank you and all the best.

Sandeep Agarwal, Edelweiss.

Good quarter.

Just one question from your side.

Can you throw some light on why we are still witnessing a muted growth on energy, utilities, retail, and also not so great number in the manufacturing and hi-tech side?

That is part one of my question.

Second, we have been hearing about the recovery in BFSI space so what is your take on that although I see numbers are not very exciting still?

And finally, what is our strategy going forward to handle the BPO growth because I think that is something which is disappointing and I know you have briefed a bit on it.

What are we doing particularly in the consulting side of the business?

Wow, Sandeep, you have covered everything.

So let me throw some color on what has worked well and what has not worked well and that will give you a sense of the direction which we're taking.

So I think Sangita is on the line, I'll get her and she can talk to a little bit about what happened in Healthcare.

And then I'll go to the areas where we haven't done that well where we have kind of (inaudible) growth.

Sangita?

Thank you, T K. Good evening and good morning to you.

So with respect to Healthcare & Life Sciences, which is the work that we do across payor, provider, medical devices, pharma, and biotech; we've really seen the following work well, which is execute on the strategy where we've had very strong large deals in this quarter.

We continue to execute on the programmatic mining of our large accounts portfolio largely around our core strength areas of infrastructure enterprise apps and also BPO.

The third thing that we see is really demand creation through our core domain centric theme that is relevant for our customers; largely around patient centricity, largely around compliance, and largely around commercial effectiveness for our customers.

So, those three pillars have really helped drive the growth and that's in line with the Wipro strategy.

Thank you, Sangita.

Maybe what I'll do is since one question was on BFSI, I'll ask Soumitro Ghosh who's sitting here to answer that question.

By the way, if you have any questions on India and Middle East also, you can ask him.

Soumitro here.

So very quick perspective from a segment perspective.

Overall in the banking and capital market space, we have seen some robust growth and within that, the retail banking specifically we have seen a fair amount of traction both on the cost takeout as well as on the invest side.

The typical demand which is coming if I have to break it up; in terms of the cost takeout, we are seeing some interesting observations in terms of simplification, resiliency, utilities, et cetera besides simple cost takeout and labor arbitrage, right.

On the invest side there are initiatives, which are in terms of modernization of the basic bank infrastructure or a insurance company infrastructure, for example payment systems for the digital channel.

And in insurance case, the policy admin systems or claim systems.

So a fair bit of spend is happening in that particular area.

Geography wise, I see that the traction is pretty good both in US as well as in Europe.

Some of the stuff which has gone off well, as Sangita spoke, was our singular focus in terms of large deals.

So we really succeeded in terms of creation of large deals and conversion of those deals.

So from an overall perspective, I think we have a fairly good robust demand and from a segment perspective, we are really seeing some good growth in terms of the banking and capital market segment.

So T K, I still have to get the answer on the energy and utility side and fair bit of idea on the manufacturing and hi-tech side?

Okay.

So I'll give you a sense of what's happening on energy and utilities.

If you look at energy and utilities and if you look at the growth over the past couple of quarters, the year-on-year growth is running at 14.1%.

So while they have had a muted quarter this quarter, one shouldn't read that as a secular trend.

In manufacturing, I think that's one area where over the past couple of quarters we have not been doing very well and I think we have a recovery plan in place and you should see that kicking in in the quarter to come.

And last bit on the consulting side, if you can just throw some light on what we are doing differently on the BPO side because I think that is a pain area?

What I can do, Sandeep, is if you don't mind, we can take that question offline because there are two more people who want to ask questions.

Okay, no issues.

Thanks a lot, T K. Thanks for your time.

Thank you very much.

Ladies and gentlemen, due to time constraints, that was our last question.

I now hand the conference back to Mr. Manoj Jaiswal for closing comments.

Thank you, Inba.

Ladies and gentlemen, thank you for joining the call today.

Just to inform you, I'm moving into a different role within Wipro Limited and Aravind Viswanathan will take over as Head of Treasury and Investor Relations and he will coordinate this going forward.

Wish you all the very best for the future.

If you have any questions that we could not take due to time constraint, please feel free to write to us and we'll be happy to answer them.

Thank you.

Thank you very much, sir.

Ladies and gentlemen, on behalf of Wipro Limited, that concludes this conference.

Thank you for joining us and you may now disconnect your lines.