Wipro Ltd (WIT) 2015 Q2 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Wipro Limited Earnings Conference Call.

As a reminder, all participant lines will be in the listen-only mode.

There will be an opportunity for you to ask questions after the presentation concludes.

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

I now hand the conference over to Mr. Aravind Viswanathan.

Thank you, and over to you sir.

Yes.

Hi, thanks.

Good evening and good morning to all of you.

Wish you all a very Happy Diwali.

A warm welcome to our quarterly earnings call.

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

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

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

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

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

The uncertainties and risk factors are being explained in our detailed filings with the 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.

The conference call will be archived and transcript will be available on our website, wipro.com.

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

Good evening, good morning to everyone in the call from across the world.

Wish you all a very Happy Diwali.

Let me start of with the result and then talk about the key areas of focus.

We grew our IT Services revenues sequentially by 3% in constant currency and at the midpoint of our guidance.

While the technology landscape is undergoing change, we see multiple areas of (technical difficulty).

Overall the demand environment continues to hold steady.

In North America, we see discretionary spending return.

In Continental Europe, we see opportunities for growth given the lower levels of outsourcing penetration.

We are also seeing temporary cutbacks in discretionary expenses of certain industry sectors, as they adjust the structural changes.

We continue to see good deal momentum in large deals lead by Infrastructure Services.

We see strong traction in the energy and utility business with 6.9% sequential growth, and in the healthcare and life sciences business with a 5.7% sequential growth.

Amongst service lines, global infrastructure services continues its investment growth -- sequential growth of 8.1%.

On service lines we see improved opportunities within our BPO and our Product Engineering business.

We continue to push on operational excellence.

We have deployed ServiceNext, our autonomic AI platform in over 20 customers in the last year to deliver increased productivity, creditability and quality in IT operations.

This model aligns with our shift to fixed price engagements.

The share of fixed price engagements increased 52.1% in quarter one to 53.1% in this quarter.

Our customers clearly see value.

Our latest customer satisfaction survey showed an increase in customer sat scores by 240 basis points year-on-year.

In terms of our strategic bench, we see great potential in digital and open source.

We see these as critical themes for our customers in the development of their strategic technology roadmaps.

We have launched an open source practice and intend to make significant investments in building advisory capability and the creation of intellectual property to gain industry leadership in this segment.

Last quarter, we've scored eight major wins.

The new digital agenda includes re-architecting value chain and re-imagining business offerings to meet the more demanding customer needs.

We're working with our clients to provide a fluid end-user experience, along with transforming the enterprise operations to increase self service, straight-through processing and lower cost and cycle times.

As a strategic initiative to deepen technical skills, we have launched a distinguished number of technical staff programs, to create a career of technical specialists who will work on developing intellectual property in next generation technologies.

We've increased our total headcount this quarter by 6,845 associates.

On the sustainability side, our efforts have been well recognized.

We've been selected as a member of the Global Dow Jones Sustainability Index 2014 for the fifth year in succession.

Thank you for your time.

Let me request Senapaty to talk about the financials in more detail.

Thanks T.K. A very, very Happy Diwali to all of you on the call.

A good day, ladies and gentlemen.

Before I talk on the financial results of the quarter, please note that for the convenience of readers, our IFRS financial statements have been translated into dollars at the noon buying rates in New York City on September 30, 2014 for cable transfers in Indian rupee, as certified by the Federal Reserve Board of New York, which was $1 equal to INR61.92.

Accordingly, revenue of our IT Services segment, that was $1,771.5 million, or in rupee terms INR109.2 billion, appears in our earnings release as $1,764 million, based on convenience translation.

Total revenue for the quarter were INR116.8 billion, an increase of 8% year-on-year.

Total net income for the quarter was INR20.8 billion, an increase of 8% year-on-year.

In IT services, our revenue for the quarter was $1,771 million, a sequential growth of 1.8% on a reported basis and in constant currency, IT services revenue grew 3%.

IT services margin declined 85 basis points on a quarter-on-quarter basis, largely due to increase in compensation cost and the other manpower cost, which was partly offset by profits from sale of a strategic investment, operational improvements and ForEx.

Let me remind you that we gave our merit increases effective June 1 to our employees.

Hence, in quarter two, there is an incremental impact of two months of wages.

Our IT Product segment delivered a revenue of INR9.2 billion for the quarter ended September 30, 2014.

On the currency front, our realized rate for the quarter two was INR61.66 versus a rate of INR60.39 realized for the quarter one of FY15.

As of period end, we had about $2.15 billion of ForEx derivative contracts as outstanding hedges.

The effective tax rate for quarter two was 22.8% as against 21.9% in the quarter one.

The increase was on account of an increase in mix of revenue from foreign subsidiaries.

For the quarter, we generated operating cash flow of INR13.8 billion, which was 66% of our net income.

We generated free cash flow of INR11.5 billion.

It was 55% of net income.

At this point, we will be open for questions.

Operator?

(Operator Instructions) Edward Caso, Wells Fargo.

It's Rick Eskelsen on for Ed.

The first question I had is T.K. in your opening remarks, you talked about, I believe, discretionary cutbacks in certain verticals.

Just wondering if you could add some color on what you're talking about there and then maybe a broader comment on what you're seeing in discretionary.

So couple of areas that we are seeing discretionary spending clearly coming back, especially if I look at it from a geographic perspective, I would say the US has been a bright spot.

We haven't seen discretionary expenses coming back in a large way in Europe.

We've seen a little bit of an uptick, both in Middle East as well as in Asia Pacific, which includes India.

So it's been a little bit of a mixed bag, strong uptake in the US, average to above-normal uptake in Asia Pacific and Middle East, and almost no uptake in Europe.

If you look at industries, we've seen clearly on the banking and financial services -- banking side especially, we've seen digital -- especially in digital front end, the changes that are happening out there really kind of driving a fair amount of discretionary spend.

We are seeing in the retail industry, especially with newer [bin] systems coming in some level of discretionary spending there and online continues to kind of grow.

In one particular industry, I mean we're finding a little bit of a headwind, especially around our commodity business that are commodity based, because [as we] seen commodity prices go down, people are really reallocating their capital budgets out of discretionary programs more into trying to see what they can do to kind of cut back in the year end, till commodity prices kind of recovers.

That's been one area where we've had a little bit of softness.

That's broadly what we see.

That's helpful.

Then the next question, just some of the top client and top 5 client metrics were a little bit weak and I know you had previously talked about seeing some follow-on work being delayed with some of your largest clients.

I'm wondering if you're still seeing that and if so why and what you expect there?

So that goes back to the earlier comment that I have raised which are specific to the industries.

I think anything you do with natural resources is an industry where we've been having a little bit of a headwind in terms of discretionary spending coming back.

With the current oil price and the metals prices being at historical lows, we expect that weakness is going to continue at least for this quarter, and probably for the first half of the next quarter.

After that, we expect that it will probably stabilize.

And then just a final question on the ATCO, wondering if you could size the contribution this quarter and what you're expecting for next quarter as well?

So on the next quarter it will be very, very minimal in terms of the contribution on this quarter [just in the result].

So we have not broken that out, Rick.

As T.K. mentioned, for current quarter, which is quarter three, we do not expect a material additional incremental revenue coming out of ATCO.

Joseph Foresi, Janney Montgomery.

I was wondering first if you could just talk a little bit about the Infrastructure business.

It appears that you've had solid growth in that business and it continues.

Are those market share gains and how would you characterize that industry at this point?

So let me hand it over to G.K. Prasanna who runs our Infrastructure business and he can give you a sense of what's happening in terms of market dynamics and where we're seeing uptick in that particular segment.

This continues to be to a very big opportunity in general and a big opportunity for Wipro in particular.

We are the leaders in this space and we continue to invest deeply.

Both in terms of our position and also in terms of our market coverage we have made improvements and that is showing, right, in results at this point of time.

We expect that we'll continue to win large deals in this space.

And then the healthcare vertical performed fairly well.

We've seen some lumpiness from some competitors.

Maybe you could just talk a little bit about where you're doing work in healthcare, and what drove the growth this quarter?

Sangita can you answer that question?

Good evening and good morning wherever you are.

Sangita please go ahead.

Sorry, this is Diwali weekend and there is a lot of noise in the background.

I'll try and be as clear and loud as possible.

So, we've seen a sequential growth momentum for the last five quarters and this really an execution of the focus areas that we had called out at a Wipro level, and we've been driving it programmatically.

The three things are increasing the share in our large accounts by balancing demand capture with demand creation around newer areas like digital as called out by TK earlier; focused pursuit of new logos in the healthcare, life sciences and medical devices, and being able to create differentiation for Wipro through our domain offerings around patient centricity and compliance.

Patient engagement and drug adherence is an important part of life sciences clients and they are leveraging our digital technologies and platforms that we have built for making this.

All of this has really led to the healthy growth that we have seen across our key accounts and some of the large deals that we won in the new logo pursuit.

And then the last one from me, the headcount moved up obviously this quarter and probably the first time in a couple of quarters where we've seen that kind of growth.

I guess what I was wondering is, is this ahead of the project ramp that you expect from your large client win -- or your recent large client win, and is any percentage of that re-badging of employees?

I'll give the re-badging question to Jatin Dalal to answer.

But overall what we do is that we've been fairly cautious about hiring if we don't see demand.

So if you look at two things that are going out in parallel, one is that you will see that our infrastructure -- our overall utilization has actually gone up last quarter, and the hiring too has gone up last quarter.

To that extent, it's really based upon the confidence that we have in terms of demand.

That's really the background behind this.

I will hand over to Jatin Dalal, our CFO, to talk about re-badging numbers.

I don't have the re-badging numbers with me.

So Joe, we have added 550 people on account of ATCO that we completed in the current quarter, of the total addition of 6,845.

And beyond that there is no unusual addition on account of re-badging.

The re-badging is part of our business, but a very small component overall, which continues as usual.

Pankaj Kapoor, Standard Chartered.

First just a small clarification, the revenue number that we have put out in the data sheet, which is excluding the Infocrossing, BPO and India, Middle East business that number seems to be flat on a quarter-on-quarter basis.

So looks like most of the incremental revenue got booked in outside.

So, is it a right presumption that the ATCO revenues would have gone in that heading, which is basically Infocrossing, BPO et cetera?

We're struggling a little bit with your question, but --

So, yes, this ATCO is outside the bucket of the numbers that you see, which is revenue mix on-site and offshore in dollar terms.

So essentially that would give some sense in terms of what would have been the contribution of ATCO to the overall revenue number?

Yes, but it would also have the overall growth numbers in Infocrossing, BPO et cetera, which you can -- I mean, so that's one bucket which is outside this one.

And given -- I mean you don't expect this bucket to change materially on a quarter-on-quarter basis in the next quarter.

So this 2% to 4% growth guidance that you've given is on the overall bucket?

Yes, 2% to 4% growth guidance that has been given is on overall bucket, of which we believe the incremental revenue on account of ATCO would not be a material number.

Fair enough.

And then question is on hiring, like -- I mean of course, we have done a very strong hiring even organically in this quarter.

Any sense in terms of how much of this would have been like anticipatory and how much of this would be essentially made up of freshers, which is basically a planned kind of a hiring?

If you can give some color on that.

So, I will ask Saurabh Govil, our Head of HR Department (technical difficulty).

So, on the hiring front, we had a planned hiring both from campuses, as well as for specific business needs with lateral experience hiring.

I think it's been a 50-50 kind of a hiring between freshers and experienced people.

And does it materially changes our view on utilization which we continue to press very high.

So you think that -- that obviously could come under some pressure in the near term, but excluding trainees, you expect the utilization [still had] headroom to grow on?

Very clearly.

If you see our utilization over the last four quarters, it has been -- we have been growing and we see headroom; 4% has grown up in the last two quarters and we clearly see headroom for us as we move forward.

And my final question is on the outlook that we're projecting for the rest of the year.

We are talking about the growth momentum picking up in the second half, which appears that the fourth quarter exit could be potentially better than 3Q.

Is that a right assumption, is that what we are basing it on and I mean, what are we really basing it on in terms of the deal wins or you have a pickup in the clients that you spoke of; that is what is driving this confidence?

Yes, so Pankaj we have spoken about the fact that we see continued momentum in the business.

We have given our quarter three guidance and we are -- our endeavor is that second half is better than first half.

I mean that's our ambition.

Now, I'm not trying to extrapolate a quarter four number from that and therefore guide a full year number to that.

But we have stated where we see the market and our performance and that's the statement that we are saying.

And just a last one on the deal wins.

Any sense in terms of TCVs, excluding the ATCO deal that we had last quarter?

Any sense in terms of how the TCV would have moved?

If you can share the absolute number.

If you can't if you can give some trajectory.

So, directionally we have done better in terms of the order booking, but we don't -- as you know that we don't share this number out.

Sandeep Muthangi, IIFL.

I have a slightly broader question.

In fact if you look this year, there has been a improvement in the deal traction, in the deal announcements et cetera.

But surprisingly, it's not yet showing in the revenue growth.

I want to ask T.K. whether there is a bit of an expectation mismatch between what we are expecting in terms of revenue growth accelerating and what will actually happen or is there any leakage in the business which is somehow offsetting the improvement in deal traction that has happened?

So I think what's happened in the past two quarters for us is that there are certain specific industries, and I talked about that very specifically in terms of commodity based industries, which have affected us this particular year, especially in the first half of the year.

This is a business that is growing very well for us in the past couple of years.

And like every business, they will go through a cycle of growth and then and then a hit when commodity prices come down.

And that has some extent affected us over the past couple of quarters.

Now the good thing is that we are not losing market share in those accounts; that we are pretty sure about.

If there is a decline in spend, I think it's our job to stay with the customer when there is a decline in spend and stay through the cycle, because when it comes up we think that we would be the beneficiaries of that and that's exactly what we continue to do.

So, from my perspective, while there have been deal wins and there have been announcements that have come up, I think some sectors have hit us negatively in the first half of the year, we expect that to continue for another quarter or maybe another quarter and a half.

Then we expect that again to recover.

So, this is not a secular trend that's particularly worrying for me.

This is something that is there, something that we live with, or live through and then life comes back to normal.

I have one more question on the ADM business.

This has been showing a decline pretty sharp over the past two quarters, it's down almost 12%.

The similar is not true for the industry, it's been weak, but not this weak.

I want to see whether there is anything particular with the way Wipro is classifying the ADM service, which is resulting in this decline, but because at least the discretionary part, the digital part, based on your commentary should be showing some pickup over here.

So, there are a couple of things, which I think is important for us to kind of -- it is also partly the way we kind of represent numbers and it is also partly our business.

I wish I could say it is one or the other, it isn't.

So if you look at our business, a majority of the decline that has come in last quarter has really come in from our telecom business.

If you look at our telecom business, our telecom business has clearly (inaudible) again I just want to be clear about it.

This is our network business that we have with network clients, where we maintain switches.

As that business comes down, you would expect to see decline in that particular segment and that line that is called ADM will decline.

The second area where we've seen some decline is again like I said in two areas.

In the commodity business we've seen large mainframe businesses kind of going off, but that we expect to be short term, it will come back.

The third is classification.

Frankly, from our perspective, we couldn't do a classification change mid stream, but we will do a classification change on April 1, because that's the logical time to do it, and we will take our components of our BAS business and classify ADM along with that and then it might present a different picture.

Ankur Rudra, CLSA.

The first question, if you can help me understand this, clearly in the last three years, Wipro is focused significantly on improving account mining and indeed you've seen a lot of success in your top 10 customers, which is quite good.

I just wanted to know your thoughts on where we are on that journey and the recent softness we've seen in your top customer, top 5 and top 10 this quarter, how much of that is a trend?

Well, from our side the way we look at it is, are we losing share in particular customers, is that share actually coming down.

And in our top 10 customers, right now we've not seen that.

So to that extent the way we see it is that we don't expect this to be a secular trend, we expect this to come back.

And when it does, I'm sure you will see it reflected in our results.

My follow-up question to that was what proportion of the top 10 customers are exposed to the commodity trends that you mentioned in terms of where you're seeing cyclicality?

Jatin, you want to answer?

So we can get into (inaudible) on that, Ankur.

I think it is -- we are not quantifying how many customers, which segments, et cetera.

We have shared that is the challenge that we're facing and we are reasonably confident that that would start coming back in -- early in next calendar, and I think that's the commentary that we like to maintain.

And the guidance for the quarter is despite that.

Fair enough.

Just one question if I can put through on margins fairly quickly.

We've seen some softness this quarter.

Maybe you can help us with the sort of a margin [vision] in terms of what was happening, given the improvement in utilization on the offshore shift.

And just related to that, we're seeing a huge spate of infrastructure deals that you have won recently which will probably ramp up in the following few quarters.

Should we expect this softness to continue?

So Ankur, I mean we'll go back to what we have always iterated and that is that the growth is first priority for the organization and we have maintained that the margins would remain in form of -- a little bit up, a little bit down, quarter-on-quarter basis and in medium term, we feel that this margin can be certainly taken up and we'll have positive bias.

Now specifically on this quarter, we had two months impact of [MSI].

So the entire margin delta is related to the manpower cost which has flown through the margin lines.

And for future, I will sort of reiterate what I began with that we will remain focused on the growth and getting the growth back and we will invest where we need to, to get the trajectory up.

Sandeep Shah, CIMB.

Just the follow-up in terms of the margins.

Jatin, we do agree that the wage inflation is hitting the margins in this quarter, but if you look at the tailwind, I think on a realized rupee dollar, there is a 2% depreciation.

At the same time there is a cross-currency headwind, that is a offshore shift which has happened.

There is a utilization increase which has happened.

There is a fixed price improvement which has happened.

So what has led to this tailwind not reflected into the margin?

So what are the headwinds other than the wage inflation in this quarter?

So, Sandeep, as you rightly mentioned, if you see operating parameters, we are remaining as focused as ever on driving the right efficiency and right competitiveness out of our operating parameters.

Having said that, this quarter specifically, we had the increase in the manpower cost, which has flown through margins.

And in terms of ForEx, there is always a little bit plus or minus, but in some form, we look at an overall margin number and that margin delta is predominantly manpower cost related.

So that's my comment.

But as you rightly pointed out, we are focused on getting the best out of our operating parameters and that will continue in coming quarters too.

And is it like the last year if you look at, the H2 the margin uptick was better with no major change in the currency over H1 with the wage inflation being behind.

Whether some amount of that trend can repeat in this year, if assuming the rupee remains at more or less similar levels?

So, Sandeep, as you are aware, we don't guide on margins and we have given our guidance on revenue.

And as I mentioned in my earlier question, I think we will remain focused on getting the growth trajectory to where we think we should be.

And therefore one would invest where one needs to in terms of ramping up resources or investing in S&M, and therefore I would not like to comment as to where the trajectory would be.

It would be transitory up or down with a medium-term focus of taking it up.

And the good amount of recruitment, is it fair to read that the sub contracting cost which has been going up in this quarter may remain at this level or -- because the recruitment has been one of the highest?

So sub contracting cost is factor of the deals that we pick up and the portfolio of services that we bid.

Sometimes, some of the niche services which we need only for few months, we prefer to hire on sub contracting basis rather than investing and hiring the resources on roles.

So I wouldn't see -- I wouldn't guide on the number that it will come down or go up, but I think you should measure us on overall growth and overall margin that we deliver.

And just the last question in terms of a bookkeeping is, one of the media reports were saying that utility client based out of North America, where Wipro was one of the vendor, there was a overrun in terms of executing the project.

So any implication in terms of the relation and that could be one of the new client-specific issue to come in the future quarters?

No implication as far as the customer is concerned.

No implication in terms of the business that the customer is concerned.

In fact it's interesting.

If you read the audit report in detail, and we can have our Investor Relations send you a copy of the audit report, you would get a sense of what the issue is actually all about.

I think it's an issue which has been blown way out of proportion.

As far as we are concerned, there is nothing to do with the customer, and the customer continues to be a valid customer of ours and we expect the customer to grow in terms of size going forward.

Diviya Nagarajan, UBS.

Thanks and congrats on the quarter.

My question is related to how you look at utilization rates and employee hiring for the Company.

Compared to some of your peers, so trending it mid to high 80s on the utilization basis, we still have some headroom for growth.

So, what was the necessity to kind of add headcount very aggressively?

Is there some skills mismatch that you're trying to address or could you kind of throw some light on this please, and also give us some color on the kind of utilization levels that you're comfortable with as peak utilization rates?

Diviya what I'll do is I'll ask Saurabh Govil to answer that question.

Diviya, if you look at overall supply chain, and let me start, if you look at utilization first, utilization as you see for the last four quarters has been going up and even in this quarter it has gone up.

So, very clearly we will see that there is headspace for us to improve further.

Second, on this hiring part if you see, yes, there are skill set gaps, which we will continue to hire from lateral and experienced people, and we will continue to hire from campuses.

We have gone to campus this year.

So that mix will continue, a combination of freshers [with] experienced people.

So the skill set gap will be both on-site and offshore.

And third is the attrition piece on the some supply, which is also stable, that has come down from the previous quarter.

If you'd see all three put together that's the way we look at the entire supply chain moving forward.

[Nitin Mehta], Macquarie.

I had two questions, first was on the third quarter outlook, a 2% to 4% sequential growth being quite impressive, given minimal contribution from ATCO, and your comments about the energy and resources clients.

Now this seems a little odd to the muted October-December quarter expectations from some of your peers.

So, A, just wanted to understand what's driving your optimism, and B, what are the risks that can prevent you to get the higher of the guidance?

One is, Nitin, when we give guidance, that guidance is in a range, right, so that is the base for guidance.

So (technical difficulty) the top end or the bottom end, we just want to hit guidance in the range.

Second is, in terms of optimism, frankly if you don't have (inaudible) optimism.

It's as simple as that.

So, we're right now in the execution phase, and as we execute we believe that's the revenue that we will get.

And the second question was for Sangita.

During the quarter we saw a major M&A deal in the healthcare vertical, just curious to understand how does that change the competitive landscape.

Sangita if you're in the call, if there are no crackers around here, you can kind of answer that.

Sorry, T.K. what did you mention?

If you can just answer that question, that will be terrific.

So yes, we did see a large acquisition that happened, but there is a large market in the active services in healthcare as well as in life sciences.

We've been growing well in the last several quarters and we would not like to comment on other companies.

Just in terms of understanding, it doesn't really alter the way you were pursuing deals.

There hasn't been a change in terms of your competitiveness to go out and win deals in this space?

Absolutely not.

We had called out earlier our focus on Medicaid and duals market that continues to grow.

We will be leveraging the platform that we have to drive growth in that business.

The healthcare reform mandates are leading to Medicaid expansion and we're confident of growing in that space as well.

Pinku Pappan, Nomura.

I just wanted to understand your demand outlook in financial services.

Two quarters back you were showing a good momentum, but I think the last two quarters the momentum has seemed to kind of weakened.

So, in your prepared remarks, you also mentioned that you're seeing good opportunities in digital and in banking.

So just put together all this, I just wanted to understand how do you see the growth outlook in the coming quarters there?

So quarter three is expected to be muted as far as banking and financial service is concerned.

We expect bank and financial services to come back in quarter one of the calendar year next year.

Sorry, and what is leading to the weakness in Q3?

No particular reason, except that billing of last quarter, in the analyst call, we had a very specifically called out that we are going to have weakness which is going to be based, number one, on client [specification].

And number two, the impact of furlough, if you look at it, is really felt by banking and financial services.

Those are the two [main] reasons why we are having this perceived slowdown in banking.

We expect that to come back again in quarter one.

Secondly I wanted to understand in the margins.

What is the quantum of wage hikes given and exactly could you quantify the margin impact due to wage hike this quarter and what do you expect in terms of impact in the next quarter?

Well, as you are aware, we had given the wage hikes and we talked about the percentages in quarter one, that was effective June 1. And only one month increased salary impact had come in quarter one.

This quarter, which is quarter two, we had two months impact.

And total manpower related cost impact on the operating margin has been the predominant delta between quarter one margin and quarter two margins.

We don't expect any additional impact in quarter three, because the full impact has now come through in quarter two.

And lastly, there was a good degree of offshore shift this quarter.

Was it planned or was there something -- is it something else that caused the shift?

I hate to tell you, Pappu, that it's accidental, it isn't.

[Ravi Mehra], Centrum Broking.

I have a couple of questions.

One is just a bookkeeping thing, if you could provide the gross margin and the sales and marketing and G&A for IT services.

Just give us a second, I'll give you the number.

And then secondly, I'd go ahead with the second question meanwhile, the follow-up.

Your utilization has gone up 130 basis points QoQ, headcount is also up 4.6%.

I would have expected realization to have shown a marginal uptick, given 550 people added on site from ATCO.

But your revenue growth in CC terms actually, it should have come in at least at 4.6% if pricing had a decline -- realization had a decline.

So should we interpret this as some kind of pricing pressure or is this a change in the mix?

Jatin, can you answer?

Can you come back on that question Ravi please?

Sorry, I didn't follow it fully.

With headcount up 4.6% QoQ and utilization also up, I thought the realization should have shown a marginal uptick given the ATCO deal.

So why is CC terms revenue growth, not at least in line with headcount growth, if realization was stable.

Yes because -- yes, so the key delta there is that the headcount addition is not entirely -- the billed headcount addition as you can imagine, a quantum of that also is the fresher hiring, which go through the training program.

So one cannot correlate the headcount -- net headcount addition with the overall revenue growth.

That is correct.

But I mean your utilization is also up, right, over the time.

Then shouldn't we look at the net headcount addition and the utilization, the gross utilization, excluding trainees or even if you take including trainees, your headcount is up -- your utilization is up.

Sure.

But what I would mention Ravi is that a lot of this, in terms of the volume growth, what you are indirectly referring to and the price uptick get determined by the timing when we make people billable.

For several quarters now, we have not broken out the volume growth and rate increases.

So I would be unable to comment on that, but I can also -- and one additional factor is that the revenue is also impacted by the growth in Wipro Infotech, which is the India business and BPO business where the volume -- the addition of people and utilization are very differently run.

So therefore I would say the question that you're asking sort of indirectly, I would sort of give an answer to that is that we are happy with the overall uptick that we've seen in the revenue and I'm unable to break it down between the volume and the rate, because we have not shared that for several quarters and we don't break it up anymore.

Alright thanks Jatin.

I will just wait for the clarification on the GM?

So the Investor Relations team will send you out the -- call the S&M and G&A percentages for IT services business.

Ankit Pande, Quant Capital.

My question would be around, whether we're seeing any challenges in retail sector.

I think we've highlighted that and that's -- we can't -- I would like your comments on that.

And also whether in what area exactly has discretionary for you improved.

You did mentioned that basically in all geographies, except Europe, you do see some uptick.

So, what areas have we really seen some uptick?

Basically, what we are seeing, Ankit, is that if we look across the Board anything to do with the front end with the customer, primarily around simplification and digital, and this is digital deployment, those two areas where we are seeing discretionary spending coming back.

As far as the retail is concerned, retail continues to be a challenge for us overall as a business, but if you look at our consumer product sector, we are doing fairly well, and that's the area of opportunity.

So overall, if you look at the entire segment that we call RCTG, our own sense is that we would -- I think we will show moderate growth this particular quarter.

And if you could clarify in RPCG what exactly, or roughly what percentage of that would be retail?

We don't break it out, but let me put it this way, the majority of the business that we have is retail, but we're seeing our consumer product business growing significantly and we are also seeing our transportation business growing significantly.

And just a follow-up on that.

I mean in your discussion with the -- especially with some of the large retail clients and customers in the US, do you see improving budgets allocation next year or is that not quite on the table yet?

I think everybody is waiting for the holiday season to finish before they decide on what they want to do with the budgets for next year.

And just one more question.

You did highlight that you won three digital deals last quarter.

Any number would you like to share with us this quarter?

Well, you know, I wish I could anticipate what deals customers are going to give me this quarter.

So they may give me deals, I think --

I meant in Q1 you highlighted that you won three.

So, in this quarter, I mean, Q2, the quarter gone by.

Is it a specific question in terms of what deals we won in quarter two?

How many deals in digital.

Digital, yes.

Oh, in digital.

In digital.

I think in digital, what we've done is we have changed our business a little bit.

Now we are kind of currently focused on doing end-to-end work for two very large -- three very large customers, where we are doing everything from managing the customer interaction, back into the way they kind of fulfill and the entire supply chain.

So, it's a fairly large -- we've got three large projects in the space, where we are doing end-to-end, which is very, very specific to industries.

So our view is that ultimately if we build competence and credibility in specific industries, our view is that we can replicate that across and that's really what we're after.

And these deals, are they related to the US directly?

It's US and Europe.

Ashish Chopra, Motilal Oswal Securities.

Just one clarification on the margins from my end.

I think the press release mentioned that the IT services margins included a profit on sale of strategic investment during the quarter.

So if you could just clarify what was that about and what was the exact quantum of the impact?

Jatin will answer that.

So, as we have published in our financials, the benefit on sale of strategic investment was approximately INR61 crores, which is part of the overall margin that we have disclosed, Ashish.

So, roughly about 0.5% (technical difficulty) margin that we have shown there (technical difficulty).

Dipesh Mehta, SBICAP Securities.

I have a couple of questions.

First is, I just want to understand about data sheet, our reporting.

When we mentioned IT Services revenue, excluding Infocrossing, BPO India and Middle East, so what IT Services revenue all includes kind of, if you can help us understand that part?

So let me answer the question to -- get the question over to Jatin Dalal, our CFO.

So effectively this includes the core IT Services business, which exclude the Infocrossing, which is our data center business, it excludes BPO and [excludes] the India and Middle East business.

It also excludes the recent acquisitions or large deals typically.

And therefore this time, it does not include the ATCO revenue.

So, does that mean next quarter onwards, ATCO would be part of IT Services revenue?

Yes, it would be.

So IT Services revenue from next quarter onwards include ATCO.

So, only these three what we mentioned, Infocrossing, BPO and India & Middle East would not be part of IT revenue on a continuous basis?

That is right.

So any specific reason for excluding ATCO for this quarter?

No, typically what we have done in past that wherever there is an M&A or acquisition which has happened during the course of the quarter or in this deal, while it was a very large toss deal, it got consummated during the quarter and therefore it is not part of it, it will get included from quarter three.

And this is what we have followed in past too.

See because when you talk about the matrices that we are used to in our business, would take some time for any kind of a larger deal when that takes place, along with the delivery centers and so on that comes in.

It takes a little time to be able to implement the templates of Wipro there, which we are expecting to be done and therefore this quarter onwards, it would be captured.

So just to focus on that IT services what we report, if I refer last three quarters, revenue remained largely flattish, INR4 million incremental every quarter.

So -- and if we -- your commentary and otherwise, I think we are suggesting uptick in our revenue stream and other things.

And we won some of the large deal as well.

So can you help us why we are missing that revenue uptick at least in this portion, rather than Company as a whole?

So I would suggest that you look at overall IT Services revenue, because we guide on that number, we get measured on that number and you all view us on that number.

I would not like to comment.

This data point has been given more from a facilitation standpoint to understand the rhythm of the matrices which are similar or in similar spirit, such as utilization and the movement of some of the other parameters which are very specific to IT Services business.

So it is more a track of the internal measurement matrices.

And therefore, you will see consistency in quarter-after-quarter on this piece of the business.

And that is the reason.

But, from a growth perspective, when you go ahead in the market, it can come in any of those pockets.

Pockets, yes.

But it's a combined one.

And last question is about cash generation.

I think this quarter appears to be weaker.

So how you see cash generation -- or business growth translating into cash generation?

So, Dipesh, if you see for first half, our free cash flow to net income and operating cash flow to net income, they are respectively at 85% and 72%.

And if you see the same numbers for FY14, they were 87% and 77%.

So effectively, for first half, there is -- the numbers are very similar to what they have been last year.

Yes, we indeed had a little lower conversion of cash in quarter two, but I don't see it as a change in any business this time around.

Omkar Hadkar, Edelweiss.

This is Sandeep from Edelweiss.

Thanks to the whole Wipro management team for taking my question and also a very happy Diwali and prosperous New Year.

T.K..

I have just one small question, most of the questions you have answered very patiently and my [questions] have largely been answered.

Just how do you see this year, now the situation versus what you were seeing last year for the industry as a whole and for Wipro also, because I'm seeing more and more sense of optimism, but it is not flowing into numbers of any of the players in that significant way.

So, my question is whether really the demand environment has significantly picked up versus last year same period or it is still not certain?

So here is what is happening Sandeep.

I can just give you a sense of what we see.

If you look at the large global players who are there, and if you had read their commentary, especially the commentary that has come out over the past week, I think everybody is converging on a point that typically in the services that we have traditionally offered in the past, there is price competition out there.

It might not necessarily result in lower ticket prices, but clearly the need for driving a different model that has got a high degree of efficiency is clearly there, and to that extent I think we're finding deals being far more competitive than we've had seen in the past couple of years.

So that's one reality that all of us have kind of faced up to.

Number two, is that if you look at the deals that we have, I think the deal pipeline looks pretty strong.

Our win ratios have been fairly decent.

I think what we're seeing right now is, in some of the existing accounts that we have had, we have had some headwinds, which are primarily sector-driven, which have affected performance over the past two quarters and we expect to see that coming back.

So, overall, if I look at last year same time in terms of absolute growth, the growth for the first two quarters has clearly been better.

And from my own perspective, I see quarter three -- we have guided for quarter three, so to that extent, whatever we have guided for quarter three kind of indicates our optimism of where we are.

And overall, if I look at it, still now, I would say, clearly we're doing better than what we were last year at this time.

That in essence is the optimism.

It is a pretty long-winded answer to a short question, but I thought it's important for you to get a context.

Hiten Sampat, Quest Investment.

Just a small question.

I had joined in a little late, but I just wanted to check, during this quarter, we have been talking that over the next three years we are expecting to reduce our headcount.

Can you just give us a brief about what you are looking at?

What I'll do is that I will get Saurabh Govil to kind of answer that question, if it's okay by you.

We have been talking about two things, let me explain this.

One is we have been speaking that we will be on automation productivity IP platform, then that will continue to be our focus.

Apart from that as I had explained earlier in the call, overall -- entire supply chain and where we will continue to hire people, both from campuses and experienced people wherever there is a skill set shortage, based on demand.

So, both will go on parallely, given that in mind, given that volume growth and the demand expected, we are gearing ourselves and hence the hiring happened in this quarter, which will [carry for us] in the future quarters.

So both are in [sync].

Our focus will continue on both sides.

So I just wanted to get a sense about the figure of 30% reduction in workforce over the next three years, will it happen and how will it happen?

I think we are getting a little too specific in terms of workforce reduction.

I don't think that's the focus.

The focus right now is to grow the business, right?

Workforce reduction is not something we're right now focused on.

We're right now focused on seeing how we can grow topline profitably.

And also the point of workforce reduction is basically for the same kind of work.

Over a period of time, you will need lesser people.

But as we grow business, we will get more business and new kinds of businesses.

And therefore, necessarily the headcount could be going up.

So it is for the same theme over a period of time, because of varieties of productivity tools and automation et cetera, you can think of headcount dropping.

But as the business grows, it will go up.

Thank you.

Ladies and gentlemen, that was our last question.

I now hand the floor back to Mr. Aravind Viswanathan for closing comments.

Ladies and gentlemen, thanks for joining the call.

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

Thank you and have a good day.

Happy Diwali.

Thank you members of the management.

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

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