Wipro Ltd (WIT) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Wipro Limited Conference Call.

(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.

Thank you, Margaret.

A warm welcome to our Q1 FY '19 earnings call.

We will begin the call with business highlights and overview by Abid, our CEO and member of the board; followed by the financial overview by our CFO, Jatin Dalal.

Afterwards, the operator will open the bridge for Q&A with our management team.

Before Abid starts, let me draw your attention to the fact that during this call, we may make certain forward-looking statements within the meaning of the 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 the actual results to differ materially from those expected.

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

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

The conference call will be archived and a transcript will be available on our website.

Let me now hand over to Abid.

Thanks, Aravind.

Good evening, and good morning, ladies and gentlemen.

As always, it is a pleasure to speak to you, and today, we are all here to talk to you about our first quarter results.

I will also share my views on the demand environment and will provide an update, as I always do for the last few quarters, on the progress of our strategic themes.

So let me talk about the Q1 performance.

As you all know, we entered the first quarter dealing with certain challenges due to the bankruptcies and the HPS decline that we were foreseeing.

I think the team stepped up and delivered -- executed quite well, and we've been able to come under upper end of our guidance and have delivered 0.1% growth in constant currency terms.

While we see continuing challenges in our India business and the HPS, which is the ACA-related decline in health care, we do see stronger momentum in the rest of our business, led by banking, financial services and insurance and the U.S., the Americas geography.

Product engineering services has also shown strong year-on-year growth.

And overall, we see good demand and momentum within the business across most of our verticals and most of our service lines.

We also had a good order booking in the quarter.

We've announced a long-term partnership with Alight today.

This strategic partnership will enable us to accelerate Alight's investment in consumer-facing technologies and services across its health, wealth and cloud businesses by leveraging Wipro's industry-leading strengths in automation, machine learning and data analytics.

Ideally, it's a good evidence of our ability to deploy at scale our modernization services, where we will be able to modernize Alight's core technology assets and deploy the Wipro HOLMES platform to be able to automate its operations to enhance user experience of Alight's customers and enabling digital transformation of their business.

Overall, our operating market -- metrics are also consistently improving, and we are quite confident that we are moving in the right direction as part of our transformation.

Let me now share the update on the strategic themes.

Digital revenue grew by 6.2% sequentially in constant currency terms and now contributes 28% of our overall revenues.

This quarter, we have 97,000 employees being reskilled in digital technologies.

We won a large North American retailer deal, where we will be their key partner in their Agile development program, primarily focused on their own digital transformation.

The retailer has embarked on setting up a digital center to transform their mobile platform, e-commerce platform as well as enable Agile development services across their enterprise.

We continue to execute well on our client mining.

In Q1, our top 10 clients grew 7.8% year-on-year.

Also, we have added 4 new clients in the $50 million-plus revenue bracket and 16 new clients in the $5 million-plus revenue bracket in the last 4 quarters.

We continue to cross sell in our existing top 100 accounts, and this quarter for a leading European utility, where we do application services, we have been chosen to migrate the entire application landscape to the cloud.

The program seeks to digitize the client's business and drive agility, superior user experience and deliver optimization of their run costs.

We continue to invest in IP, and in Q1, we were granted 43 new patents, which takes our total patents granted to 423.

Of the 2,042 patents that we have filed till the end of Q1, over 40% of patents are in new-edge technologies where we are investing quite heavily in research and development, including data analytics, artificial intelligence, natural language processing, wireless technologies of the future, et cetera.

Our strategic focus on blockchain has resulted in now over 10 client engagements in areas like P2P energy trading, track and trace in the supply chain space and decentralized payments and settlements across clients -- across industries and different geographies.

Leveraging our IP, Wipro has been chosen as a systems integration partner by a large global OEM for the development and validation of their next gen Android-based automotive infotainment system.

Wipro HOLMES will help automate the validation solution.

We continue to deploy Wipro HOLMES enterprise-wide for one of the large banks we are deploying across the IT infrastructure space.

In Q1, we have saved nearly 1.1% efforts across all of our fixed price programs.

Our fixed price mix has now reached a new high of 58.9%.

Our automation initiatives have helped us improve our revenue per employee by 4.1% on an year-on-year basis.

We've also won a digital transformation infrastructure modernization contract from a European mining and material solutions company.

Our proprietary platform, Wipro HOLMES, will simplify, standardize and modernize the client's information and communication technology landscape.

We continue to drive localization and have now reached 58% localization in the U.S., and we continue to maintain high levels of localization across all the other markets, like Continental Europe, U.K., APAC, and LATAM.

We have funded 13 companies through Wipro Ventures till now, including 2 new companies this fiscal, and we have seen continued interest from our clients in adopting the solutions and we becoming the innovation partners for our clients, where we are able to bring some of these technologies being developed in the startups into the clients' enterprise systems and embedded with our solutions to our clients, which provides us the differentiation to be able to win deals against competition with these customers.

Our own internal crowdsourcing platform now has about 57,000 Wipro employees on crowdsourcing, and we've completed about 639 challenges till date.

We have started seeing instances of our clients now utilizing Topcoder to execute sizable projects in their app dev space.

We continue to be named as leaders in various industry analyst reports across digital automation, AI, analytics, IoT, cloud, et cetera.

And we are positioned as leaders in 150 such reports, of which 24 are in the digital and what we call as the new-age technology space.

To conclude, we have seen an improved demand environment, but we do have some pockets specific to us of concern where we are executing with rigor, and we have seen some good results.

We have focused on executing on our strategy, and I feel confident that we are on the right track.

With this, I encourage Jatin to speak on our financials.

Good evening, good morning.

Let me talk about our quarter 1 performance.

We came at the upper end of the guidance at 0.1% in constant currency.

We concluded the sale of our hosted data center business and recorded a gain of INR 2,529 million.

And our guidance for quarter 2 is 0.3% to 2.3% sequentially, after excluding from the bridge, the revenue which pertains to the divested DCS business.

Our margin was 17.2%.

We spoke about quarter 4 margin and an operational range of 16%.

We believe we were at a similar range in quarter 1. And as we move forward, we believe that we will remain -- we are comfortable at that range and to improve as the revenue momentum picks up despite 2 months impact of MSI that we'll see in quarter 2.

Our currency was INR 67.61 realization versus INR 65.04.

Our ETR was at 21.9% compared to 20.4% in quarter 4. Our EPS grew 9.9% year-on-year basis.

We generated cash flow of INR 28.8 billion, which was 136% of our net income, which is significantly ahead of what we have done over the previous 3 quarters.

Our cash position was gross cash of $4.7 billion versus $4.4 billion in quarter 4, and net cash of $3 billion versus $2.4 billion at the end of quarter 4.

We benefited from the sale or the receipt of the data center business, which is reflected in our net cash position.

Our ForEx was $2.6 billion of ForEx derivative contracts as hedges as at the end of quarter 1.

Now let me quickly talk about the sectoral outlook as we move forward.

BFSI had seen strong momentum for Wipro, grew 14%-plus in current quarter on a volume-wise basis and 3% in a constant currency sequential basis.

And we continue to see benefit our early investment in digital and client mining and see continued robust momentum as we move forward.

Consumer is going through a massive transformation world over, especially in retail, and our consumer BU grew 2.6% in constant currency, led by media and travel and transportation parts of the business.

ENU showing growth momentum with help of renewed investment, renewed demand and renewed growth in oil and gas segment, both in downstream and upstream.

We are seeing some softness in the utility space, but on the whole we delivered a healthy 1.7% sequential in constant currency for quarter 1.

Technology, we saw a seasonal lower quarter 1 performance, but year-on-year growth which is between 7% and 8% reflects the true momentum that is exhibited by the segment.

Communication is showing signs of recovery, though current quarter performance is impacted by the bankruptcy that we had seen in that segment in India, but overall we feel positive about the future prospects of communication as we move forward in the year.

Our health business remain impacted -- remains impacted due to legislative challenges in Affordable Care Act.

And in India and Middle East, we remain very selective vis-à-vis the deals that we are picking up, and it is also impacted by the client bankruptcy that I spoke about before.

We're seeing good traction in business process services.

We are also seeing strong growth in product engineering space in the current quarter and overall a very robust performance in U.S. geography, which is reflective of our traction and momentum.

With that, we are open for your questions.

(Operator Instructions) The first question is from the line of Sudheer Guntupalli from AMBIT Capital.

So if you look at the service lines in this quarter -- performance of service lines in this quarter, most of them -- I think a couple of them have remained pretty soft and, in fact, witnessed revenue decline as well on a sequential basis, especially I'm talking about cloud and infrastructure services.

And even the so-called next-generation technologies like data analytics and AI, the growth is quite soft.

So can you just give some more color on that.

And my second question would be in the health -- about the health care business.

So what is the way forward here because we have been seeing either revenue declines or soft growth for quite a few quarters till now and I expect this uncertainty around repeal and replace Obamacare campaign is going to go forward.

So what exactly is our plan B over here, if this uncertainty is expected to continue going forward?

This is Bhanu here.

I'll take the first part of the question, and then I'll hand over to Abid.

On the practices that you would see, right, you would see a significant momentum on some of the practices such as the Modern Application Services that we have started and also the growth on the data analytics and insights services has become good as well, right?

So those 2 practices do well.

On the cloud and infrastructure services practice, the decline that you see right now, we have very strong order book right now.

Our focus on cloud has really yielded good results.

Our order book is very great.

And the small bump that you're seeing right now is very -- certain specific events that have happened and it seems that we -- in terms of restructuring our India business, where we are focused on more -- getting more focused on a very profitable and relevant business for Wipro, and that's the reason why you would see a variation in the cloud and infrastructure business.

But overall, the demand environment as well as our winning capability as well as our execution on the cloud and infrastructure services has been very robust.

So with that, I will -- the last what I wanted to talk about is in the business process services side.

Our focus on BPaaS has increased, and you would have seen the deal that we announced, the deal that we won recently where our focus is on delivering a lot more modern digitalized business process outsourcing services on the HRO space right now.

With that, I'll hand over to Abid now to answer the second part of question.

I think right now on the health business, while the core of our health business is robust, we are winning deals over there, one of the deals we talked about last quarter is a significant deal, which we are currently ramping up.

But the decline in the HPS business has impacted both the overall gross top line growth as well as the margins of this business.

I think as you rightly said, we don't have a line of sight in terms of what happens in other -- again, within Q1, there was a little bit of bad news in terms of the reimbursement to insurers from the administrator, which does create a little bit of uncertainty on how many insurers that are right now there would continue to be able to profitably run their cash flows without the reimbursements coming to them.

And there is a key deadline that happens some time in Q2 for the -- preparing for the next season's enrollment.

So we will have a little more clarity as we go through the quarter.

But that headwind -- we've learned to live with that uncertainty now, but we are focusing on replatforming, leveraging the HPS platform to be able to cross-sell services to the same clients and to newer clients.

And in the last quarter, we've seen a couple of deal wins in the restructured platform.

So in summary, we are moving ahead from the ACA part of the business.

The domain, the talent and the platform that is available, we have now reengineered it to be able to provide certain other services that we can go into the detail if there is interest.

But essentially, to rebuild that business on things that we think in the long term would be both our ability to cross-sell to our clients as well as grow the business would be enhanced.

Sir, then is it fair to say that even if this regulatory environment continues to be uncertain like this, there won't be any markdowns of the HPS effect going forward in the future because -- if you have a proper plan B in place?

So Sudheer, it's difficult to make that judgment.

We take that assessment in an ongoing manner.

And we have been -- we have shared that the revenue is shrinking.

So that is something that we watch carefully, but it's very difficult to make comment about future because the whole idea is, the future is uncertain around that business.

So it's difficult to give a forward view on that aspect.

Fair enough, sir.

And within cloud and infrastructure services part, if you can exactly dissect and inform us what exactly -- where exactly the problem is?

Is it in the infrastructure services part or in the cloud migrations part?

That would be helpful.

So what happens is on the data sheet when you look at these numbers, these are our company-wide numbers.

And if you look at the India and Middle East business numbers, you will see a constant currency drop of about 7.5%, which is part of the restructuring that we are doing of our India business.

A lot of our India business or majority of our India business is actually what was the old GIS business, and that is a business which in India, especially, was a lot of deskside support and what I would call as the lower end services, which as part of our restructuring of the India business, we are not renewing existing contracts as they come up for renewal, and we are pivoting the India business to a digital transformation, application-led, consulting-led business, which is higher in profitability.

So that erosion of revenue of India business gets equally reflected in the cloud and infrastructure services business in the service lines.

Otherwise, the core global business is, as Bhanu mentioned, we are winning significant deals, we are gaining market share and we are executing well.

One more thing that happens in our Q1, which is a seasonal -- very seasonal to Wipro is some of the large deals have productivity benefits delivered year-on-year in these multiyear contracts, and those productivity benefits come together and show up in the Q1 numbers.

And that is why seasonally the CIS business looks lower.

Otherwise, I'm very satisfied with how our CIS team has been executing the deal wins, the pipeline is robust, the order book is very robust, and we continue to have market leadership in C&IS.

The next question is from the line of Nitin Padmanabhan from Investec.

Just wanted your thoughts in terms of -- I see sort of not renew these deals on the India business for infrastructure.

When do you think the positives versus negatives will sort of level out?

And do you think the negative leveling would be -- would sort of ease out over the next couple of quarters?

Or we would have a higher negative proportion?

There is a little kind of -- it should pivot and turnaround in the next couple of quarters.

Only thing is when there is a larger deal which we don't renew versus the digital programs in India are still relatively smaller, we do see top line shrinkage, but the quality of revenue and the profit is better.

So I feel quite good about the transformation.

I talked about some of the changes we had made to the India leadership team.

We are now seeing more deals in this space that we would like to be in.

And as you know, we have a very good brand and market leadership in the market.

It's just a pivot that we need to undergo, and we are staying the course and executing on our pivot.

Sure.

And just 2 more, if I may.

One is on the depreciation has sort of fallen this quarter.

Is that something that we should sort of assume going forward?

And why has it fallen this quarter?

The second being that if you look at the wins, which you said the order book looks pretty good, how would you compare it qualitatively versus same time last year?

Is it significantly better than the same time last year?

Yes.

So let me answer the first question, Nitin.

And I will request Bhanu to answer the second.

On -- yes, the depreciation line has fallen sequentially from quarter 4 to quarter 1 on account of 2 things.

We had a onetime impact of amortization acceleration that we had to do for HPS, that is one.

Two, there is a reduction because there is a divestment accounting that we have done around depreciation line for the piece that we have sold off.

Going forward, you can take the current number as a deadline to project your future forecast.

So Nitin, this is Bhanu here.

On the order book side, we are seeing a robust demand environment and given the propositions and the investments that we have made in digital, cloud, cybersecurity, and so on, our ability to capture this demand has been very high as well.

Compared to the same quarter last year, our order book has become much better in terms of growth, it's in the double-digit growth compared to last year same quarter.

And as importantly as the digital is getting delivered at scale, our -- the size of the deals that we are participating in and the size of the deals that we are able to create has become much better as well.

So we see a very strong, good robust environment for us.

The next question is from the line of Diviya Nagarajan from UBS.

My question is on financial services.

Could you run us through how, within financial services, the split between banking, financial services and insurance looks to you right now and the relative growth rates within those 2 segments?

That's one.

And secondly, overall, I think the energy space seems to have picked up, but some of your competitors' growth rates are very strong there.

When do you expect that some of your utility-based negatives will start to fade and the energy utility space starts to really pick up for you?

Sure, Diviya.

So in the banking, financial services and insurance space, I think we have got very balanced, across-the-board growth.

From a market's perspective, the U.S. market has been giving in the growth for us and then we've seen robust growth in U.K. and Australia.

And we've had some new wins in the Continental Europe market.

Across the various segments, in the retail banking and primarily the banking segment, we've had good growth from our existing accounts, where primarily we've migrated ourselves into the cloud migration and then the enterprise renovation as banks undergo their digital journey at scale.

One of the advantages we have in the banking and financial services is our early investment in design-led digital transformation at scale has worked out very well with us, as banks are adopting digital at scale now.

Also, in the capital market segment, where there is a significant opportunity for automation and operations transformation, we have seen good demand, and we've gained leadership in that space, both for our existing customers as we've become the partners for their intelligent automation center for some of the customers who are traditionally not our banking customers, but chose us for the strength that we have in operations transformation through automation.

Our insurance segment also looks good traditionally.

We've had some decline in the last 3 or 4 years in our insurance segment, but it has picked up now, and we've been able to, again through the digital transformation route and cloud migration and what we call as the enterprise modernization, we've been seeing good traction.

So across the subverticals and across the markets, we see robust demand, and we've been able to execute well in the banking, financial services and insurance segment.

My last question is on your HOLMES platform.

Do you have any data in terms of revenue exposure or anything else that you would like to share?

And do you have any target time frame?

If not, by when you can share that kind of information with us?

Yes, Diviya.

And I also wanted to answer the -- I was trying to answer the second part of your question on energy and utilities.

Actually, our -- we have leadership in the oil and gas of the energy business, and that has been growing very well, rather last year's growth was double digit, and we have been able to win some significant engagements in our existing customers as well as open new accounts in the energy or the oil and gas segment.

Our challenge in ENU business is in the utilities segment, where in a couple of markets, we have had specific issues where we had large enterprise-run operations for over 10 years and due to regulatory requirements, they had to go to market and in some cases switch providers beyond a certain time, and that is where we lost a couple of large accounts, which -- we've had some robust hunting wins, but it is taking time for that to rebuild, and that is where our utilities business is challenged.

And traditionally, we've not had a significant presence in the U.S. market and that is what we are building.

So that should take next 2 or 3 quarters, the pipeline looks good.

But otherwise, on an overall basis, we will now start seeing growth in the ENU business.

On the HOLMES platform, the way we started on HOLMES is by both deploying HOLMES in our existing accounts, especially, if you remember, about 8 quarters back, we had picked 10 of our top accounts, where we would deploy HOLMES in a meaningful manner.

And of that, about 3 accounts we've got enterprise-level deployment, which both enables us to engineer HOLMES as well as create reference case studies.

Now we are seeing large deal wins enabled by HOLMES for enterprise automation and transformation.

We do have both license revenue as well as IP pricing built into our transformation deals, but then some of these deals are also outcome-based deals and we are not publishing those numbers yet in terms of separate segment for HOLMES.

But I feel quite optimistic.

Even this quarter, the deals that we have announced, we have HOLMES license component in those deals.

The next question is from the line of Ashwin Mehta from Nomura.

I had 2 questions.

One, I want to get a sense in terms of what is the current run rate of your data center business?

And what is the expected impact of the business shift to Ensono in the subsequent quarters?

Yes.

So Ashwin, if you do the reverse maths, our reported revenue for quarter 1 was $2,026.5 million and when you equate that with the growth that we have given, which is 0.3% to 2.3%, that base is about 1.1%, that we are not considering when we give this guidance, excluding the divested DCS portion.

Going forward -- sorry, can you repeat your question on future, Ashwin, what exactly you wanted to understand?

Yes.

So basically, when you had last reminded, I think you had indicated that probably closer to 50% of this revenue shifts onto Ensono and the remaining still stays on with you till the contracts move.

So is that the same expectation going forward?

And over what period can we expect this reduction in revenues?

Yes.

So that is right, Ashwin.

Approximately, 50% will continue with us on an immediate basis, but that could shift over next few quarters or next couple of years, but that would be part of our overall sort of guidance philosophy part of the business, and we won't break that out every quarter.

Okay, okay.

Fair enough.

The second question is in terms of your IT Products segment.

What has led to the margins shifting from positive to almost 20% negative here this quarter, even though the revenues have actually grown marginally?

Yes, so this is part of our couple of projects in India business and the PDD impact, which has caused the negative performance in quarter 1. But I want you to also look at our performance over last 4 quarters and years before.

So we have significantly shrunk this business, we have made it profitable, as you would have seen, over last 4 quarters.

Quarter 1, we had some surprises again, but we remain very focused on running a tight profitable products business, which will over a period of time will shrink in its size and the capital that we employ in that business.

Jatin, can you remind us what was the second thing that you've said.

So it's partly India and the second thing was PDT or something, I didn't get that?

No, no.

It's both the impact of project increases in cost in projects in India and provision for doubtful debts in the same business, which has impacted the lower -- which has caused the lower profitability in Products segment.

Okay, sure.

And just one last one, if I can squeeze.

So on BFSI, almost 1/5 of your incremental revenue seemed to be coming in from your top client.

So just wanted to get a sense in terms of outlook on how diversified is the BFSI demand and how do you see the outlook for your top line because they seemed to have given you almost 30%-plus growth last year?

So Ashwin, as I had mentioned in detail, our BFSI portfolio growth has been very robust across markets and verticals, which I answered in the first question.

And we did have a couple of good deal wins as part of our client mining initiatives that I talk about every quarter where we invest in our existing customers and grow our existing customers.

Our top 10 clients over the last year have grown double digit on a year-on-year basis, and that is actually a reflection of what you rightly pointed out, our ability to mine our clients better and grow our large customers and cross-sell various services into them.

The next question is from the line of Srinivas Rao from Deutsche Bank.

This is Srini from Deutsche Bank.

I have 2 questions.

One, you have talked about the digital transformation projects and then you talked about the pricing in context of that and your revenue per employee, which has gone up this quarter.

Just wanted to check, given that now you have almost 60% of your revenues on fixed-price contracts, how do you see the outlook for, I mean, growth in revenue per employee, driven by your automation efforts within the company?

So any -- and any commentary on that would be helpful.

Secondly, just taking from the previous question which was asked.

You are, obviously, shrinking some parts of your businesses, particularly in India, in order to become more profitable.

What kind of revenue concentration risks you are running as a result of this strategy in some of the verticals.

For example, you've grown your larger clients much, much faster than your overall company.

And hence, how do you mitigate the risk of revenue concentration?

So on a revenue per employee basis, we're quite focused on improving our realizations as we think there is opportunity.

And as we drive higher fixed price and higher digital, that opportunity gets realized more.

At the same time, we are taking more deals, which are outcome based, and in some of those deals, initially there is a higher number of employees that need to be deployed, simply because of a lower level of automation and over certain initial period in the deal, we then end up doing the transformation and deployment of automation.

So I would also expect a little bit of lumpiness in that, but the longer-term trend would be continuous improvement in revenue per employee.

In the India business, we have a good banking and financial services business.

So that part of the segment doesn't get impacted.

We have quite a lot of concentration in the government segment, which in our numbers get reflected in the consumer vertical.

And as you know, we are leaders in the telecom business in India, where we had an unfortunate incident last quarter and that gets reflected in the communications number.

Otherwise, the communications business in India with some of the newer players is growing well.

And then we have -- all the other verticals are present in relatively smaller numbers, and we don't see a huge impact as part of our restructuring.

Sir, also a overall company basis, your top 10 clients are growing much faster.

So is that potentially leading to some concentration risks in any particular geographies or lines?

So Srini, for many years, your questions were, we are not -- our top customers are not growing ahead of company growth rate.

I think that is one parameter that you...

No, no, no.

I'm not criticizing it, sir.

I'm not criticizing at all.

I'm just saying from an operating management's perspective, it has its reward and there's potential risk.

So is there any thought process of how would you like to mitigate some and you have indicated trying to selling more services.

On that -- in that context is what I was asking.

Srini, let me give you in that context 2 data points.

Number one, if you go to our data sheet and if you see quarter -- for FY '16/17 and if you see the revenue that was generated by our top 10 customers, was 17.1%.

If you see for '17/18, that number became 17.8%.

And if you see in quarter 1, that number is 18.3%.

So -- and all this while, our -- you could look at a headline and say, you are not moving 9 customers to 10 customers and 11 customers beyond 100.

But we are generating and farming every year better from the base that we have.

Also, if you see last year same quarter, our more than $50 million customers, were 36, which are now 40.

So we have been able to bump up our revenue run rate from top 40 customers, which is quite solid.

So therefore, I wouldn't worry about concentration the way you're depicting.

The next question is from the line of Sandeep Shah from CGS-CIMB.

Just the question is in terms of manufacturing.

So this quarter, the dip looks like very high at 5.4% Q-on-Q.

So is this a new challenge?

Or this was been anticipated earlier itself at the start of the quarter?

And it's been split into now 2 verticals.

So how this pair versus -- compare versus the earlier quarter outlook?

So Sandeep, as I had mentioned a couple of quarters back that the reason we had split our MNT business was that while we have robust growth in the technology space, some of the transformation moving to digital in the manufacturing space required a revamp of our manufacturing team and the offerings that we take to the market.

So that -- this is part of our transformation that we are undergoing, and this drop was anticipated because there were a couple of large infrastructural contracts for manufacturing customers, where we had relatively high product component that we have exited.

So the top line has gone down, but the pipeline is very good in what I would call as digital for manufacturing, which is areas of additive manufacturing, plant automation, IoT, and those are starting to happen at scale.

One of the deals I talked about is in the auto segment in the autonomous vehicles.

So we are very focused on making sure that our manufacturing business is a business relevant in the future, and we have a strong team that is driving the pipeline and the order book, and I feel quite good about it.

It may take a couple of quarters for it to get to a higher growth number as we restructure that a little bit, but we have a strong client base, we have customers where there is a huge opportunity to potentially up-sell and cross-sell.

And this manufacturing being a segment of its own, we are able to provide higher focus onto it, so I feel quite good about it.

Okay, okay.

So Abid, is it fair to say, looking at your comments now, apart from India as well as the HPS acquired health care unit, we can say that most of the challenges in most of the other industry segments has been out and we can be on a growth path outside these 2 segments going forward?

Yes.

Manufacturing will take a couple of more quarters, but as I said that -- we are getting some early wins, and we'll end up there in smaller size compared to the large infrastructure engagements that we've had historically.

And within the ENU segment, the utility's vertical.

But broadly, your assessment is correct.

Okay, okay.

The second question is on margins.

Jatin, if I look at the Y-o-Y, the margins are down by 120 basis points.

So if I look at the rupee, the levels are higher, the fixed price is higher, utilization is higher, offshore is higher.

So what is causing this kind of a margin where we are -- actually there is no bottom and the improvement is taking time despite lot of productivity gains which are coming into the numbers?

Yes.

So Sandeep, let me -- just give me a reference piece of 120 basis points, so that we speak -- we are speaking on the same lines.

Yes.

So I think the June '17, I have a number for IT Services 16.8%.

And if I look at the June '18 quarter, after excluding the gain from the data center business, it is 15.6%.

Sure.

So let me articulate again what I said in the beginning of the call, is that we believe that quarter 4 was at around 16% range.

There were a lot of pluses and minuses in quarter 1. And therefore, if I put -- including you'll see the PDD line, which is higher, there is a restructuring piece which has happened in India and Middle East.

So if I put what I think are onetime in nature and total them up, I think we are operating around 16% operating margin range.

So that's the framework that we see.

But even if I see that, we are talking about 80 basis points.

So let me articulate those 80 basis points.

It is predominantly certain parts of the businesses, which Abid spoke about before and I articulated, which is lower profitability in our HealthPlan business, a restructuring impact which India and Middle East have seen in quarter 1. We had couple of good quarters, but we had once again an impact in India and Middle East.

And third part, which is not necessarily bad, is a part of our business is growing rapidly and investing in what I call a transition and related cost, which should come back during the rest of the year.

So that's how I see this 3 key sort of attributes of where we are.

Now looking ahead, we believe that we definitely have opportunity to improve through the year as the revenue momentum picks up, and that's the trajectory we spoke about in the beginning of the call.

Okay.

So Jatin, your initial remarks was for 2Q, we will have 2 months of wage inflation.

But despite that, you are saying that tailwinds will help us to improve in 2Q versus 1Q.

Hello?

Hello?

(inaudible) with the management.

We can't seem to hear any audio from your side, can you please confirm?

Yes.

Can you hear me now?

Yes, we can hear you now.

Sorry, so yes, Sandeep, we believe that we have sufficient levers, including automation, that is our prime thrust, that should help us mitigate and keep us in the range that I have indicated.

Okay.

And just on depreciation.

If I look at on a Y-o-Y basis also the depreciation is down, and the data center business sale was effective at the end of June.

So why that should be a reason for a reduction in the depreciation for 1Q?

Yes.

So there is -- because -- there is a divestment-related accounting treatment whereby that depreciation is not appearing in the depreciation line, and it has got netted off in the other operating income line that you are seeing.

And therefore, that's the reason I articulated that the current value that you see in financials is a good base for the forecast that you may want to build your model for.

The next question is from the line of Ravi Menon from Elara Capital.

If you could give some color on the Europe business, that would be great.

We've seen in the past that you had a couple of good quarters and then we have a quarter where you have Q-o-Q decline on a constant-currency basis.

So this quarter, again, we have seen that.

So what's leading to those?

And should we correlate that with the softness in the utilities that you had called out?

Yes, Ravi, I wouldn't worry on the Europe decline that you see right now.

It is related to the manufacturing decline that I talked about for one of the customers, where we had an engagement getting over in an infrastructure space.

So otherwise, both the deal wins and the new wins as well as existing client growth is relatively good in Europe.

And utilities, you were saying that we could see some softness.

So are you expecting that to get offset by the energy momentum?

Or should we brace for some slight decline in the vertical?

And it would be helpful if you could give a timeline for that, over the next of couple or 6 months or would it be even longer than that?

Ravi, I'm sorry, your line is not very clear.

Would you -- can you repeat the question?

Yes.

So on the utilities side, you had called out some softness.

Should we expect that this will get offset by energy and -- in the energy side?

Or would we see actually a decline for the ENU vertical?

No, the utilities side decline will be more than offset by the energy side.

So you should be able to see growth going forward.

The next question is from the line of Dipesh Mehta from SBICAP Securities.

Just wanted to get clarity on the deal intake and growth acceleration.

Now we are indicating for the last couple of quarters about having stronger deal intake, and this time we are indicating around double-digit Y-o-Y acceleration in terms of intake.

When you expect it to have -- getting reflected into revenue side?

Because we have some leakages, which is hurting overall performance.

So if you can provide some timeline by when you expect deal intake to get reflected into revenue side.

So there are 2 leakages or 2 headwinds -- 2 sets of headwinds that we see.

One is the proactive restructuring that we are doing, which I have talked about, whether it is India, Middle East, whether it is some parts of the business that I alluded to earlier.

And the second one is some of the external factors that have impacted some specific parts of our business like the regulation in the U.S. on ACA and the HPS-related business.

So the core business, we are kind of growing well, our volume growth has been good.

As Abid said, our order book has been good.

I think as we complete our restructuring of this part which has been the niche bucket for us, we should be able to see consistent growth.

But going forward, as we have guided for Q2, there is positive momentum and given the demand environment, I expect to have continued positive momentum for the rest of the year.

Just, Abid, one question.

Now is it possible to say what is the HPS revenue run rate this quarter?

Sorry, we are not breaking out revenues of individual entities.

But whether it has reached -- because I think earlier you alluded around $30 million a quarter kind of thing, whether it has materially dropped off this quarter?

Well, it has dropped, but we are still holding around the same run rate.

The next question is from the line of Avishai Kantor from Cowen and Company.

To follow-up on the BFSI and the large deal wins in this area, are you seeing improved win rates in BFSI?

And do you think that this strong growth is driven by market share gains?

Or is it really overall better spending by some of the specific clients?

Actually, we are seeing growth coming in 3 components.

One is, as you would remember that historically Wipro had a relatively lower exposure compared to some of our peers in the banking and financial services segment and with our digital capability, we've been able to acquire some customers who are new to us and that is market share gain for us.

Second is our ability to cross-sell multiple services because a few of our top 100 customers are BFSI customers and their, as the top 100 customers, mining growth has been good, it has translated into the BFSI growth.

And the third area of growth where it's coming in BFSI is the growth that we are having in both the -- what we call as the new growth markets outside of U.S. and U.K. as well, where we see the BFSI growth.

So I think all the 3 factors are playing well to have a balanced growth across the BFSI segment.

And my next question is on wage inflation.

Any changes in your wage inflation assumptions?

Any changes in the competition for talent, which we know is pretty stiff and any follow -- potential follow-through impact on attrition that you see?

No.

We gave our wage increase effective 1st June at industry levels, at middle-single digits in India and low single digits for overseas employees.

It's in line with what has happened across the industry.

And my last question.

You spoke about automation.

Can you give some more color on automation efforts, maybe talk about the potential long-term penetration rates with your client base, how is it affecting contractual structures?

So this is Bhanu here.

On automation, our focus on automation has been there for a while, and I'm sure we've talked to you about our HOLMES platform, which is our platform, the cognitive platform that holds all our automation.

As our fixed price projects have increased, our scope for automation has also increased significantly.

And we have started to report the automation progress over the last 4 quarters, and you would see that this quarter we reported 1.1% of our overall fixed price efforts are being delivered through our automation right now.

And we do believe that the investment that we are making in building the new bots and the engineering of new bots and the kind of deployment speed at which we are deploying these bots, we do believe that this percentage is going to increase well over the few coming quarters as well.

The next question is from the line of Vibhor Singhal from PhillipCapital.

Just a small question from my side.

I know this has been asked before regarding the top line and the BFSI concentration -- I mean, the BFSI growth and the top line concentration.

I just want to spin that question around a bit, that we know that top line and the BFSI growth has coincided a lot.

But if I look at the top 5 growth, excluding the top 1 customer, I think we've had a decline on a Q-on-Q basis and the growth as well on a Y-on-Y basis is there, but it's not materially as it looks like if you exclude the top client customer.

Just some color on maybe that non-top -- I mean, the top 5, top 10 clients, excluding the top client, how are they going and how are we seeing the growth trajectory from them?

I think we overall see growth in all of our top 100 customers, including top 10, top 5. And of course, some accounts grow faster than others in terms of the potential and the deal wins over there, but we see this as a portfolio.

And across the verticals now -- as I said, when you go through each one of them, for example, for one of the large manufacturing accounts, we did have an engagement where we got out of the past through products part of the business, which is part of the top 5, or top 10, and those impacts would come.

So I would look at it as a portfolio, and we feel quite comfortable that we are able to cross-sell various services and are able to improve our share of the wallet in our top customers, which we have been focusing on.

And Vibhor, let me sort of give a context with the data.

Our top customer is 3.5% of our revenues and our BFSI, if you assume the top customer is in BFSI, is about 30% of our revenues.

So 2.6% growth in top customer cannot drive a 3% growth on 10x revenue size.

So really, the revenue is coming from across and not just from top customer.

If I may on the telecom segment, the communications segment.

I mean, slowly 2%, 3% kind of an erosion in this segment has now dropped your revenues to around $110 million per quarter run rate, far cry from what it used to be a couple of years back if you look at it.

So we know this segment is going through a lot of consolidation and weakness as well.

But where do we see the bottom in this segment for us?

And any color on basically what kind of preparation or what kind of, let's say, capabilities that we have in terms of, let's say, any incremental spending on 5G that comes in?

In what position are we to basically be able to take advantage of that incremental spend that might come?

So I feel quite good on our communications segment future.

We have got a new leadership team in the communications segment, where we are refocused our efforts on the newer parts of the communications segment, especially around 5G, around a lot of the digital transformation in terms of the consumer space.

We have been able to also acquire new clients in a couple of new markets for us.

So I would take the communications vertical as bottomed out and see growth, although the growth will be a little patchy for the next couple of quarters before we have a smooth trajectory of growth in the communications vertical.

And sir, the decline that we have seen in this segment over the past, let's say, 7 or 8 quarters, would you attribute that to industry weakness?

Or is it some client specific issues that we're facing.

Of course, we've had an insolvency and other issues, but apart from that, the overall weakness was mainly because -- the weakness was mainly because of industry or some specific client issues that we had?

No, except for the bankruptcy and the completion of a large program in Africa, there were no client-specific issues.

It was more of an overall industry weakness in the communications service provider segment.

Thank you.

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

I now hand the conference over to Mr. Aravind Viswanathan for closing comments.

Thank you all for joining the call.

In case we could not take any questions due to time constraint, please feel free to reach out to the IR team.

Have a nice day.

Thank you.

On behalf of Wipro Limited, that concludes this conference.

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