Wipro Ltd (WIT) 2019 Q2 法說會逐字稿

Ladies and gentlemen, good day, and welcome to the Wipro Limited Q2 FY '19 Results Conference Call.

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

I now hand the conference over to Aparna Iyer, Vice President and Corporate Treasurer, Wipro Limited.

Thank you and over to you, ma'am.

Thank you, [Karna].

Warm welcome to our Q2 FY '19 earnings call.

We will begin this call with the business highlights and overview by Abid, our Chief Executive Officer and Member of the Board, followed by 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 the 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.

Over to you, Abid.

Thank you, Aparna.

Good evening and good morning, ladies and gentlemen.

It is always a pleasure for my team and me to speak to you on this call.

I am quite pleased with our results this quarter, both from a revenue growth and margin improvement perspective.

Let me share the details on our Q2 performance, my views on the demand environment, and the progress on the strategic themes that I provide you every quarter.

In constant currency terms, our revenue increased by 2.8%, which is at the top end of our guidance and one of our highest sequential improvement in recent quarters.

It is also a quarter when we announced the $1.5 billion deal, which is our largest deal to date.

We see good momentum in our business lead by steady performance in banking and financial services and our consumer businesses.

We see revival in the energy and utility business.

We have also seen an uptake in our communication business driven by core enterprise spent as well as the new age areas like 5G.

While our technology business has been doing well, we are expecting Q3 to be impacted by furloughs.

In the health segment, we continue to see challenge, driven by the uncertainty around the ACA, which continues to persist.

From a geographies perspective, U.S. continues to see a pickup in growth across industry segments.

Also we have seen good momentum in Asia Pacific and in emerging markets in general.

Asia Pacific has grown over 8% quarter-on-quarter.

The demand environment and traction in the global markets, especially around digital transformation at scale and enterprise modernization, is strong and we seem to be getting a fair share of that market.

The credit for our strong execution through the quarter goes to the entire team and it's reflected in the steady improvement and secular performance across our operating metrics and client metrics.

Our net utilization, excluding trainees, has reached a high of 85.5% in Q2.

Our operating margin, adjusted for the onetime impact from the settlement of the litigation that we had announced earlier, is at 18.1%.

As part of our India business reorganization, we are carving out our Indian public sector unit, which is called PSU and Indian government business, given the distinct operating rhythm and the need for differentiated execution trigger.

There is so far India strategy remains unchanged and we will focus on enterprise customers leveraging our portfolio offerings in terms of digital transformation and cloud enablement where we see good traction.

Given this, we will carve out the India PSU and India government business out of our IT Services segment in our financials, effective quarter ending December 31, 2018.

The enterprise business in India will continue to be part of our IT Services segment.

Our outlook for the quarter ended December 31, 2018 reflects this change.

Now let me share a quick update on the 6 strategic themes.

Our digital revenue continues to grow quite strongly and it has increased 13.4% sequentially in Q2.

It now contributes 31.4% of our revenues.

Our digitally trained workforce has crossed the 100,000 Wiproites mark in Q2 and we now have 102,000 employees trained in digital technologies.

Our focus on client mining continues to pay us off well.

In Q2, our top 10 clients grew sequentially by 3.6% in constant currency terms.

We've added $100 million new client and 7 clients have been added to the $10 million plus revenue bucket this quarter.

In Q2, we have filed 50 new patents as part of our drive for non-linearity in IP, taking our total patents applied to 2,071.

More than 40% of the patents that are granted to Wipro are in new age technologies like data analytics, artificial intelligence, natural language processing, wireless technology, AV and EV investments that we are making in the engineering space et cetera.

On automation, we've reached a new milestone of covering 350 of our existing clients where we have deployed Wipro HOLMES.

Our effort savings, especially in fixed price projects, has improved from 1.1% to 3% across our fixed price effort in Q2 and our fixed price mix continues to remain strong at about 58.9%.

This automation productivity is reflected in the improvement in our margins in Q2.

We continued to focus on localization and a significant milestone this quarter on localization is that we have crossed 60% localized workforce in the U.S. and we announced setting up a center in Reading in the U.K. for training fresh hires that we get from colleges along with a couple of universities there locally and running an apprenticeship program in the U.K. We continue to maintain strong localization level in Continental Europe and across other high-cost markets where we've embarked on this journey.

On innovation, this quarter we closed 2 new investments to our Wipro Ventures platform.

One in CloudGenix which is the SD-WAN start-up based in San Jose, California and another in Boldstart Ventures, a New York-based seed-stage fund that primarily invests in enterprise software automation and cybersecurity.

This takes our total number of investments from our $100 million Wipro Venture funds to 17.

Our entrepreneurship program that we call Horizon program, continues to be quite active and it's running 10 teams around technologies like cybersecurity, analytics, autonomous vehicle, industry platform and solutions for additive manufacturing.

We incubated one new team in the area of enterprise performance management this quarter.

We continue to see strong traction on Topcoder, our crowdsourcing platform.

Essentially, in the areas of data science and analytics as more global customers seek to gain insights and accelerate efficiencies through improved analytics and customer algorithms, Topcoder and crowdsourcing is uniquely positioned to answer the pressing customer pinpoint, especially in this market caused by lack of accessible talent.

In Q2, our internal crowdsourcing program which is called Top Gear, we trained -- we onboarded 6,000 more Wiproites, taking the total number of Wiproites on the crowdsourcing platform to 63,000 employees.

We also won a crowdsourcing contract for Predictive Asset Management and energy forecasting from an APAC based utilities and urban development group.

The reengineering of the platform that we've done to enable enterprise based crowdsourcing has started now seeing very good traction in enterprise clients.

Wipro continues to gain recognition in the industry analysts as leader across various industry segments.

We are positioned as leader in 163 such reports of which 25 are in the digital space.

In conclusion, I am very satisfied with a strong quarter of execution across both revenues and margins, which is pretty secular across business units, service lines and geographies.

The consistent improvement in our client metrics, operating metrics, order bookings, as well as demand environment gives me confidence that we will continue to build further on this momentum.

I'll now ask Jatin to give a little more color on our financials.

So I'll broadly cover the key numbers.

Our revenues are at the higher end of the guidance at 2.8% sequentially.

Our margin in normalized 18.1%, which reflects about 1.8% operational improvement after 2 quarters -- 2 months of salary increase of 70 basis point of ForEx.

Our ETR has remained broadly in the same range of 22.1% versus 21.9% in quarter 1. Our EPS would have shown upwards of 12% growth had been taken an adjustment for the normalization of operating margin.

Our hedge position at the end of the quarter is roughly $2.6 billion of hedges, which is between a similar range as previous quarters.

And our cash position, both at gross level and at net level has remained in the same range at $4.5 billion and around $3 billion at the end of quarter.

Our guidance for quarter 3 reflects the new segment definition that we've spoken about in our press release and it is 1% to 3% in the constant currency that we've mentioned as part of our press release.

We will be very happy to take your questions from here on.

Ladies and gentlemen, we will now begin the question and answer session.

(Operator Instructions) The first question is from the line of Surendra Goyal from Citigroup.

Just had a few questions mainly for Jatin.

So to begin with Jatin, can you please help us construct some kind of margin walk sequentially.

The new utilization improvement, even in ex-trainees, seems to be 30 odd [business lines] Q-o-Q which should not be that significant for the margin, so could you really help us reconcile what the key puts and takes where, because really that could also have impacted on the negative side.

Yes.

So if you see the broker margin expansion on a normalized basis it's roughly 2.5%.

Of that, 70 basis points is ForEx and 1.8% is the margin expansion operationally after absorbing 2 months of MSI.

The operational levers have been utilization, as you can see in the datasheet.

But more importantly, it is the price improvement which has come through in terms of the automation initiatives, as well as operating profit improvements in some of our global subsidiaries.

Combined, both has delivered that 1.8% operational margin improvement.

And what would be the impact of rate hikes, because that would also be somewhere in this, right?

Yes.

We've not called out the impact separately of rate hike, Surendra.

Like we spoke last time, you could see that we've shared the 1 month impact and you could extrapolate the 2 months impact.

So also this 1.8% is a fairly significant margin improvement, Jatin.

So how confident are you of the sustainability of this?

Or is this something which could kind of bounce around a bit slower as you go forward?

So Surendra, if you recall, in quarter 1 I shared that we were confident of seeing the margins improving as we go through the year and growth comes back.

And this is exactly as we have panned out.

We have come at the top end of our guidance in terms of revenue.

We have been able to execute operationally on our levers, therefore we have improved our margins.

Going forward, we look like that there will be a place between some form of furlough impact in quarter 3. Operational rhythm that will continue to drive and some of the investments that we had done before how the play out vis-Ã -vis the revenue momentum that it further create for us.

But we feel confident to remain in a narrow band of our quarter 2 profitability.

Sure.

And Jatin just a couple of more of data questions.

So could you share what were the margins of the business which was divested last quarter, that's first?

And what are the margins of the India PSU business this quarter, the business which you will be carving out, because that would also be a tailwind for reported margins in the next quarter, if my understanding is right.

Yes.

But -- so let me start by saying that the business which got hived off, you have the numbers for that and that number is not a large number to make the impact that you're seeing.

So that was a very small impact.

The reason we divested that business was the strategic reason that what made sense 10 years back was no longer of our strategy priority now.

It also improved our return on capital employed as you can see it as part of our balance sheet.

Even for the India business, the reasons are very strategic.

To execute in that segment very differently than what we execute or what we drive the objectives which we have for the rest of the business.

And that business is also a small number of $34 million.

So to that extent we definitely -- we don't see a big impact, but certainly it is a lower margins than the company average margin.

To that extent, there will be a small -- a tiny sort of delta, but it won't be something that would change the direction or the quantum materially.

So that's a profit making business?

As you know India business remains volatile, but yes, it's a profit making business.

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

While we've seen very good improvement in the $10 million plus bucket of clients, lower down we are actually not seeing a good pipeline materialize.

Is this because you think that the existing client numbers is sufficient and you should just focus on client mining or should we expect to see even at the bottom end some additions going forward?

So of course, the numbers that you see over here are net numbers.

But we've got -- as we've been talking about, we are quite focused on client mining.

And apart from the traditional cross-selling and up-selling that you would expect in clients, also the qualification of customer that we take at the start is important, because while customers who initially come into $1 million or $5 million bucket, we qualify customers from their potential to grow to $10 million or $50 million bucket as well.

Some of the metrics also change because of 2 other reasons.

One is the currency volatility, gets some customers in or around because of the materiality of counting a customer has a small threshold, but that threshold does change when currency fluctuates quite a lot.

And second is with the DCS divestment a lot of the small customers went along with it.

So both of that has also helped with our client focus in smaller set of clients with a merger per client average revenue.

Okay, thank you.

And secondly, in the largest segments of Modern Application Services and the infrastructure services the growth is little slower than the other smaller segments.

So -- especially in application services do you expect to see a pickup in growth or we should expect the other segments to continue to drive momentum?

Ravi, this is Bhanu here.

On the Modern Application services, if you look at last couple of quarters, the momentum has been really good.

This quarter number you just -- you should just take that as a small elaboration.

But the demand environment for the Modern Application Services, both in terms of the digital transformation as well as the cloud migrations are really picking up for us and both these are our big bets as well in terms of our service offerings.

On the infrastructure services, again infrastructure services has been a very strong performer for us.

It's a very strong area of service for us.

And in a couple of the sectors that you talked about, they caused this decline, but other the infrastructure services is doing very well.

Again, I want to remind you that as we looked at the infrastructure services, we migrated ourselves to the cloud services right now and those services are really doing extremely well for us.

And even our pipeline is looking very strong for the cloud migrations.

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

Two questions actually.

Jatin in the last quarter, you had spoken about some transition in related cost that should come back this quarter.

So is that a meaningful contributor to the margins gain?

No, Nitin.

There is no onetime contribution because of any transition gains in quarter 2 that has contributed to margins.

Sure.

The other thing was in the India business, which we have sort of mentioned separately close to $34 million.

I understand that business is a business that you are slowly pushing down and not focusing on.

So any thoughts on how that could -- how the impact could be from a revenue perspective there in that business?

So let me answer that question, Nitin, because we are actually very upbeat on India.

And we feel that we need to pivot from what we have been traditionally doing in terms of services in India to the same services that we have been successful in the global market, which is around digital transformation and enterprise-wide modernization in the enterprise segment, and some of the Digital India and Smart City related activities, Smart Governance related activities in the government and the PSU segment.

That pivot requires us to be able to -- especially in government and PSU segment, which we have panned out in a separate segment, we need time to be able to complete the long-term contract that we have with government and PSU and that is why to provide a high level of transparency in a relatively different rigor and motion of that business, we've put in a separate segment.

But overall, our focus on the India business, as well as our -- the opportunity that we see to be able to sell in the India market new services, is very high.

It will see some revenue decline as you've been seeing even in the past few quarters as we get out of some of the services which primarily I would call as product reselling services, product-related services, feet on street kind of activity that we have been historically doing in the India market.

And some of the tail accounts and customer consolidation that we have done there.

So we are well on our path on the enterprise side, the government and PSU may take a little longer to make that pivot happen.

Sure, great.

Just one last one.

The Healthcare and Life Sciences business, you had anyway highlighted earlier on that, that would see some headwinds.

How do you see that business now going forward?

So as you would recall, our Healthcare business also has a large component of our acquisition that we did, HPS, which is quite focused on the ACA.

And those headwinds and uncertainty continue, and hence the decline in revenue.

On a run rate basis, as we have said we had an over $130 million of annual run rate decline.

And this quarter, again is an important quarter in that business, because open enrollment happens in the U.S., which happens every year and that determines the revenues and it's a member -- fee-based business.

And based on the open enrollment, we will know how next year will pan out.

But what is more important is that we have new leadership in that business.

We are making investments in adjacent areas and we are very confident, we're not are depending on the ACA business to come back.

We'll be very happy when it comes back and we will again be able to make a lot of that opportunity.

But while we wait for that, we are moving into some of the adjacent business and we have had some good early success in that.

So in the next year 2 or 3 quarters, I feel good about our Health business coming back to our industry level growth.

The next question is from the line of Viju George from JPMorgan.

Abid, this has been a good quarter.

Performance seems to be quite well rounded.

Typically in the past, we've seen that when Wipro has delivered a good quarter, it has not been consistent enough to deliver in similar fashion thereafter and we've possibly seen some starts.

Do you feel absolutely confident that this could be the first of a series of consistent quarters and what are the factors that we give you comfort in the case?

So Viju, I feel quite confident in terms of both the demand in the market that I see and the investments in the capabilities that we have done, purely from the industry transformation perspective as well as some of the restructuring and the work we have done internally on the Wipro specific challenges that we had.

So to that extent, I feel quite comfortable.

Again, at least the next quarter guidance is in front of you.

But, overall, what gives me confidence also is that some of the restructuring and transformative steps that we have taken, and as I've been sharing over the last 8 quarters, 10 quarters, we've consistently progressed quite well on that.

We are seeing good customer satisfaction, good customer growth coming in existing customers, good order book coming to us.

We're getting our fair share of wins and we've been able to fulfill and execute on that.

And this growth, as you see, is quite secular.

If we look at it, about 4 out of all 6 themes has delivered in constant currency about 4% growth quarter-on-quarter.

So I feel quite comfortable with it.

Of course, we are always quite watchful.

There is work that needs to be done in the India business to get it back to growth.

While Middle East has stopped degrowing, we need to get back to company average growth over there.

We talked about the Healthcare business.

Some work still needs to happen in our manufacturing business.

We are seeing early signs in comps, but we need to have that sustainable.

I feel comfortable, we'll continue our market leadership in growth in the BFSI business.

The Consumer business has been doing relatively well, which I continue to be quite comfortable.

In geographies, I think, we've got good traction in U.S. We've got good traction in Asia Pacific.

We need to do a little bit more.

There's a little uncertainty in the U.K. part of the markets.

Continental Europe is reasonably good, but we have a good pipeline and we are getting a fair share of wins over there.

So, overall, across markets, across BUs and also across service lines, for example, our -- we -- in the beginning of this financial year, we restructured or reorganized all of our service lines to the futuristic service lines.

And one of the major changes we made is in our data and analytics practice, which we combined it with artificial intelligence and made it data analytics and artificial intelligence practice.

I've been very encouraged with the results with that, because a lot of data and especially with our Topcoder platform, and DDP platform and IP investments that we've made, the results and uptick is quite good on that.

So, overall, I feel quite comfortable.

Again, we will focus heads down on execution, whether it is in existing customers, whether it is in winning new deals.

And as you saw, large deals do give us a lot of confidence and also give us momentum which helps us with our progress.

So that's how I would kind of summarize the overconfidence that I see in our performance.

Sure, thanks.

I appreciate that.

Just another question on the visas and discrete cost.

Some of companies, peers Infosys specifically also Hexaware today indicated either rising sharp cost of contracting costs or inability to service demand because of H-1B visa issues.

Given the red-hot labor market in the U.S. and the wage inflation there, do you think the progression in -- of risk in execution or cost to curve maybe for Wipro or for the industry?

So that's a great question and one of the things, as I talked about the 10 quarters of 6 themes that I've been updating localization, especially starting with our largest market was a key strategic theme that we had adopted.

And now we're 60% localized, which does help us a little bit and gives us an advantage, especially in new age skills to be able to fulfill in the market relatively better.

On the cost part, I don't think there is a major difference in the employee cost, whether you send a visa enabled employee to the U.S. or you hire an employee locally in the U.S., the wages are at par.

The difference becomes in the operating model, which may be slightly more expensive, because in the old visa base if a person -- a project gets over, the person comes back to India and the bench cost would be incurred in India.

Now we incur the bench cost in the U.S. Similarly, training cost is incurred in the U.S. So those kind of things does have a little bit of a cost play there.

But, overall, I think from how we have institutionalized the business model both from a demand servicing perspective as well as cost perspective, we've now baked it into our operating model, and we don't see any headwind because of that.

Of course, especially in the U.S., the talent market is quite hot and the demand/supply gap continues and to that extent we get affected like all other players would.

But not something that worries you.

No.

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

So Abid, my question was just a small one.

So -- I mean when we give that our guidance for the next quarter is 1% to 3% and this is adjusting for the carving out of India PSU in current business, this guidance still includes, I would say, the incremental 2 months revenue of Alight deal I would say?

Yes, thank you for -- this is Jatin.

That is right.

Alight is like any other deal for us, which is now part of our overall guidance and we'll continue to execute on that.

Sure.

So I mean -- again, if I want to just adjust for it, so would that mean that our guidance probably comes to -- more like 0% to 2% other than 1% to 3%?

We don't break down that as you know.

And therefore, it would be -- I would say it may not be right to see that way.

You have to see it in the light of the fact that this quarter 3 does have a furlough impact which is very common for our industry and that had been factored in overall in our guidance.

Fair enough.

Thanks.

I understand that.

Also secondly, in the last 2 quarters we've seen 2 successful formal divestments.

Initially we hived off the data center business and now basically the India PSU business.

So I guess what -- we can probably deduce that we more in -- we trying to move more towards a more stable business with more predictable cash flows and revenues and margins.

So any more divestments that would -- for that we could expect maybe in the next few coming quarters?

Or I mean, at least that is not yet done with it?

I would put it that we are on a transformational journey.

And as I have always said, both the industry has transforming and there is some Wipro specific transformation that we need to undertake.

In doing that, build and buy is always an option one looks at.

We've also looked at sell or divest as an option, because it's equally important to acquire and we've acquired some skills, which we thought give us advantage in the market and that has paid off well to us.

Similarly, there are some parts of the business, which from a long-term strategic perspective and shareholder value perspective, and customer value perspective, may have little bit slide and we may divest or restructure.

So I wouldn't say it's an end of restructuring.

But whenever we find an opportunity to acquire something we will acquire and similarly when we find an opportunity that the value is higher for a shareholder for divesting, we may divest and -- move on in that transformation.

I just -- we were -- I just want to add that from a financial standpoint the 2 transactions are very different, one was truly a divestment of the entity and second is a segment change and the financial results will reflect in our net profit and EPS.

So I just wanted to make that distinction in the color of the question that you asked.

Sure, definitely.

I was just trying to basically get towards the transformation -- the earnings journey that Abid was talking of, that's clear.

Just one last question, if I can squeeze in.

I'm not sure if you've answered that before.

Just on the HPS business that we had acquired -- so I mean last quarter we had mentioned that we might be, but we were not sure close to bottoming out of that business.

Do we have that visibility at this point of time or is this still kind of ambiguous and we may not know where the bottom lies for that business?

Yes.

So Vibhor, this is Bhanu here.

On HPS business, the uncertainty on the administrative requirements for the ACA continues.

So that uncertainty still continues.

But this quarter, specifically quarter 3, which is enrollment period, we have to watch carefully how the enrollment volumes pick up.

Okay.

So maybe after this quarter we would be able to take a call more on whether the business is bottomed out and where we could still see cycle of basically downsizing of that business.

Yes.

It will little bit more clearer than what it is now.

The next question is from the line of Kawaljeet Saluja from Kotak Securities.

Since the flavor of the call seems to be discussion on margins, let me add in my bit as well.

So Jatin, you spoke about an operational efficiency drive which contributed to margin improvement.

Now, logically, this operational efficiently drive should effect in margin improvement across verticals.

However, when I look at the segmental margin, BFSI segment margins have barely improved.

Whereas verticals in which there has been muted growth has seen a significant margin improvement.

Whether it is technology, manufacturing, health and healthcare vertical, what explains this anomaly?

Yes.

So Kawaljeet, it's a great question.

In some form the margin improvement is driven by 2 or 3 separate areas of focus, one is in core IT services business in which we drive margin through automation, through employee productivity and through utilization and levers like that.

Traditionally, where higher fixed price projects, your ability to drive automation is much faster than the rest of your IT Services business, so that's one layer.

The second layer is, I spoke about, we have been also very focused in some of, what we call as our delivery units, or operating subsidiaries where we have driven margin.

Now these operating subsidiaries could have rate of certain segments higher or lower.

And third is India, Middle East which is a separate unit here and that also plays through in the segment that is reflected here.

So it is a combination of all 3 factors which have played out.

And I would feed the way it has -- we are quite happy with all 3 layers, of course, there are certain levers that I mentioned are far quicker to be implemented in certain parts of the business and others will have to follow.

But, Jatin, to persist on that point, see your BFSI -- unless you are driving automation and employee productivity, BFSI margin should have gone up which is really up in the maximum growth.

But if the underperforming verticals are showing margin improvement and actually in some of those verticals there have been absolute cost decline, I mean somehow, it just gives us feeling that there has been some amount of aggressive cost rationalization which could have driven margins.

So if you can help me break up the margin drivers between the 3 layers that you highlighted that will just help me draw better mental map of drivers, what underlying margin improvement.

While, I will let Jatin quantify.

Let me give you a little bit of color.

So there's obviously a huge scope for efficiency improvement which we have undertaken across the organization and that has delivered results.

So apart from the traditional lever there are 2 major levers that we've deployed.

One, which I have always spoken about is the automation deployment led productivity.

And if you look at our -- and just give a color on one segment, the BFSI segment.

A lot of our growth in the BFSI segment recently has come from digital transformation.

So the Run part of the business in certain vertical has been relatively higher compared to, say, BFSI segment and there the benefit we get from automation, especially in our IT infrastructure services, the CIS service line or the digital operations and platform or the traditional BPS service line, is relatively higher.

So that kind of improvement gets reflected over there.

However, there are levers within BFSI as well which will show a margin improvement.

It may take a little longer.

Both the TNN content of BFSI, the lower amount of Run services and higher amount of digital transformational services in BFSI and overall TNN component would have relatively less impact on some of the levers we are driving in the short term.

However, in the long term, across the business, we see opportunity for margin improvement and maintaining the margin in a narrow band as Jatin mentioned.

So Kawaljeet, I mean, we -- as we spoke in the beginning of the quarter -- beginning of the call, we have not broken it out.

But if you have to say roughly half of the benefit of that 1.8% has come from how we have uplifted our operating rhythm in some of our delivery units and subsidiaries and roughly half has come through automation and other core operating units in global business.

Got that.

And just a final question.

I hope that whatever operational efficiency has driven in global subsidiaries would not have any negative implications for giving the longer-term benefit.

Essentially, what I'm referring to is acquisition that you have made.

I hope that there's been no greater cost rationalization on that account.

Yeah, so I think the point which -- I'll reiterate what Abid spoke.

Our -- even within the global business or even -- and that applies even for the operating subsidiaries.

Where there is a Run and there is an ability to increase a better productivity, we have gone all across.

And then there is an investment element which comes in where there are high growth areas and that does go and you spend some of the productivity to keep the growth going.

So, overall, it does -- if at all, I would say, the very fact that margins are not uniform across should give all of us comfort that we're investing some of the gains where we need to invest.

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

Yes, thanks for the opportunity, and congrats on a good set of results.

Abid, just one strategic question.

In terms of BFS, you commented that the digital traction is much more deeper and that has led to a consistent double-digit Y-o-Y growth in constant currency.

But, however, we do not see this kind of growth in the other segment.

So is it fair to say that our digital traction is still a work in progress for the other set of verticals.

And can you split within 31% of digital sales what could we be the keenness towards the BFSI as an industry?

So, like most technology cycles that I had seen, the BFSI segment is faster adopter of those cycle and that's what we saw starting a couple of years back in the BFSI segment.

It was very closely followed by our consumer segment.

Some of the segments which are relatively less penetrated in digital would be health segment, where it takes relatively longer because of the higher level of regulation in that business.

Others are kind of somewhere in the middle.

Today's numbers would be quite uniform.

If I look at the 13-plus percent quarter-on-quarter growth, would reflect a pretty much quite uniformly between 10% to 15% across all the 6 verticals or SBUs.

But historical effect of some of that starting early would be much higher in BFSI and consumer compared to some of the other verticals.

Otherwise, from an offerings perspective, I think we had strong offering, strong investments in a digital use cases across the verticals and we continue to invest as we see the market opportunity developing.

Okay.

Just on fixed price project contribution, we kept seeing that the productivity gains are also driving from that side of the business.

But that number has remained at close to 57% or 59% over the last several quarters.

So is it fair to say that this is now toppish, but we have lot of work to do in terms of achieving a 100% gains within the existing fixed price projects.

So how should we look at this?

What you did look at is not the fixed price percentage, but the automation percentage in fixed price which I talked about which has moved from 1.1% to 3%, and that does have a flow-through effect on our margin and the whole conversation we had around Run business being able to be automated better than the transformation and development kind of business.

And what could be a potential 3% can reach to over a medium to longer term as your target is to apply more and more automation going forward on the Run side of the business?

This is Bhanu here.

I think potential is somewhere between 10% to 15%, so with the current technology and availability right now.

But I am sure we also have evolved, build new capabilities, new technologies, new platform so that we increase further.

So right now we see somewhere between -- right now 10% to 15% and obviously the new -- when we get into customer accommodations some things do get passed to the customer, right, and some things do get retained in the organization.

Okay, okay.

And just last question Abid, Q4 generally is one of the strongest for the Wipro in terms of organic growth.

So even this year looking at your confidence about the company-specific issues getting behind the large deals wins, the client confidence, the client mining, is it fair to say that trend will even continue this year?

Because that will define in terms of your growth outlook next year.

So I am not asking any numbers, but directionally is it a fair assumption even for this year as a whole?

Yes, so Sandeep, difficult question to answer as you would appreciate.

We guide on the quarter 3. Certainly our outlook is well reflected there.

And we will talk about more as we come to quarter 4. It would be too early to start speculating on where that will end.

The next question is from the line of Madhu Babu from Prabhudas Lilladher.

Sir, banking has been doing very well for us, I think the sixth consecutive quarter of strong growth.

So is that a few client which is driving growth or is it the market share gains or what does your impetus consist?

I think Shaji's on the line.

I'll let Shaji answer that question for banking.

This is Shaji Farooq.

See, that our growth -- that one thing that's being very positive about the growth in BFSI is that it's been very secular, right?

Of course, there are challenges in one area or other for a short period of time or [constructive] challenges.

But overall growth has been very evenly spread out both across regions and the very various verticals that is banking, capital markets and insurance.

So I don't know, I hope that answers your question.

Okay.

And since the subcontracting expense around 16.5% of our revenues, so how much of that is onsite subcontracting?

Madhu are you asking some of the business side or is it a different question?

No, I generally just want to see the trend, because that's been actually not gradually increasing, the subcon expenses.

So overall, I think it's around 16.5% of our revenue from -- right -- subcon expenses.

Madhu, this is Bhanu here.

See our -- we don't break out the subcontract expenses between India and onsite and offshore and the geographic locations, right?

The number has grown a little bit, but it will remain in a narrow range.

As, Abid explained, it will -- we have built a significant amount of talent capability at all the onsite locations as well.

So to that extent we'll be able to manage that subcon expenses, right?

Sir, and last one on the currency.

If you see there's almost a 15% drop in the currency over the last 6, 7 months.

So going into January, do you see some of your large clients asking for renegotiation in the pricing of the traditional service?

Yes.

So, Madhu, we don't see that as we speak.

And as you know we have been [binge bout] in last 2 to 3 years where from 67, 68, 69 we went all the way to 64, 65.

And from there on, if I say there is a movement, which is on the opposite side now.

So right now we don't anticipate or we're not seeing on the horizon those kind of requests.

The next question is from the line of Shashi Bhusan from Axis Capital.

Now how is the profitability in HPS could have been given the challenges therein.

And how this moved quarter-on-quarter?

Or did we do some rationalization given the challenges?

And is it over or still some benefits would flow in?

So it's a interesting question.

HPS is a platform business, which compared to average Wipro has a higher proportion of fixed cost.

And hence the HPS team has done an amazing job in bringing the cost down as the revenue run rate fell, as I mentioned, by about $130 million or more than 50% of its run rate.

But, obviously, given the nature of the fixed costs, the costs have not gone down in proportion of the revenue.

So the profitability of that business is severely challenged.

But as I said, we're pivoting that business.

We're not waiting for the ACA uncertainty to get resolved.

And that volume growth definitely will give us incremental margin improvement simply, because a lot of the cost is already been made very efficient.

And second one on the employee addition, which is pretty strong this quarter.

Was there any inorganic component in that or is it all in anticipation to the growth that we're seeing?

Saurabh here.

There is no inorganic component, it's all organic.

About 9,000 employees have come for the large deal, which we had gotten from Alight and that's led to the overall increase.

So Alight employee got added in this quarter, but the value contribution would be next quarter for 2 months.

Okay, so 1-month contribution for Alight came in this quarter itself?

You're right.

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

I had few question for Jatin.

Jatin in notes it's mentioned that sale of traded cloud-based licenses is reported as part of IT Services.

Just wanted to understand what's the nature of this revenue and what could be the approximate quantum or trend that you've seen in these revenues?

Yes.

So this has -- this is a not a new phenomenon.

This has been for -- over last few years.

This is nothing but -- if in a end-to-end applications deal, if I have to also run through a operating lease model for any cloud licenses or that is factored in, because it is integral part of the overall solution and sale, and it's difficult to carve it out as a separate element or separate cost.

Having said that, the component is very small.

It is only to the extent that we have committed to customer to provide end-to-end services.

And we don't see that number anyway material to overall $2 billion of revenue that we're -- it's very, very tiny component.

Okay.

Fair enough.

And the second question was in terms of the Alight deal.

We've indicated a run rate of closer $150 million to $160 million there.

Is this after taking into account the amortization of the cost of a Alight deal on revenues?

So Ashwin, we've not given.

We've given a deal revenue over 10 years and that of course, translates to annual number of $150 million.

But we've not broken it down year wise.

Of course, and that number is after factoring the accounting that we'll do vis-a-vis the various legs of the transaction.

And just one last one.

In terms of your product business for the last 2 quarters there has been almost a 15% to 20% negative margin, which has been generated.

It was more or less closer to breakeven or minor positive margins earlier.

So what exactly has happened there for margins to have fallen off so sharply?

So Ashwin, if you see, we've been -- this segment has been volatile for us.

Whole of '16-'17 we had a negative contribution on profit side from that.

And '17-'18 was a good year for us where we had small profitability from that.

Over the years we continue to bring this segment down.

And this just reflects the volatility that is present in the segment.

We do expect that we will curtail this negative contribution to net profit down in quarter 3 and quarter 4. But as a segment it is difficult to predict, because 1 or 2 deals where ForEx volatility or a particular component, subcomponent price could change the overall quarter outlook for profitability for that segment.

And as we've mentioned always, this segment is in, predominately in India and our endeavor is to not go beyond our commitments and remain very, very strategic vis-a-vis new opportunities that we perceive here.

And the India carve out that you will have will be a separate reporting segment or it will be part of the products?

It will be a separate reporting segment.

The next question is from the line of Rahul Jain from Emkay Global.

So if you could help in terms of guiding how this hive offs and sell-off that we did of some of the businesses in past.

What are further potential opportunity within the current business?

And also in terms of what are the growth and margin expectation threshold that a segment need to achieve when you take, as you said, buy or make or sell kind of end decisions?

So our expectation of our IT services segment is well reflected in our numbers that we talk about.

So long its products and the new segment or the India carve out segment that we have done, the focus really there would be to enhance the effectiveness of the capital employed there, reduce the capital employed there over a period of time and restructure and improve the overall profitability of that business and not necessarily the growth that we see on the IT services side.

Product business is, in fact with the objective of only selling what is necessary for us to remain a relevant player from a system integration space in India and to the extent it is strategic for us to sell that.

So all 3 segments have different objectives then they're not governed by any uniform financial or strategic goals.

Thank you.

Ladies and gentlemen, that was the last question for today.

I now hand the conference over to Aparna Iyer for the closing comments.

Over to you, ma'am.

Thank you all for joining the call.

In case we could not have taken any questions due to time constraints please feel reach -- please feel free to reach out to the Investor Relations team.

Have a nice day.

Thank you, ladies and gentlemen.

On behalf of Wipro Limited, that concludes this conference call.

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