Indian software major Wipro on Wednesday announced a 4 percent sequential growth in its rupee revenue, matching analysts' expectations.
Speaking to CNBC-TV18's Kritika Saxena, Chief Executive Officer TK Kurien says the lower guidance announced by the management is based upon seasonality. Furloughs, specifically the demand that is coming in from non IT segments, from US and Europe will impact the company's Q3 growth.
The Q3 guidance was lower than analysts' expectations of 1.5-3.5 percent growth.
Jatin Dalal, Senior VP & CFO, says the company has managed to retain leadership in oil vertical and expects to see an uptick.
Furthermore, the management expects the pressure on top clients to continue till Q4 and hopes for a demand pickup in Q1FY17.
Below is the verbatim transcript of the interview..
Q: First question as always, the guidance obviously is much lower than the lowest estimates that analysts had set for you. Is the seasonality that you are seeing in the next two quarters more pronounced than it had been over the last two years?
Kurien: Again if you go back to our guidance it is an important point that I wanted to kind of stress again. Our guidance for quarter three is really based upon two factors. Number one is seasonality and that is really driven by two things. Furloughs as they come in. For the first time after many quarters we are seeing that a demand outside of IT is more than demand from IT. In the past we have been able to predict our demand from IT very well. Now, in this particular case we are a little uncertain about what furloughs means for business demand. That is one of the factors.
The second big factor is that we are going through some transitions at some of the customers where we had won some consolidation deals. Most of the transitions that we are going though today, while we go through transition period we don't accrue any revenue. After the transition is over we will probably start accruing revenue. And to that extent that lag we see in quarter three. Those are the two things which are impacting our guidance for quarter three.
Q: Margin band has been fairly strong this quarter given the fact that you have seasonal pressure but going forward what is the target band because typically you would prefer to remain above the 21 percent band but it is much lower this time?
Dalal: If you see our quarter two had an impact of two month's salary increase. We had given our salary increase on June 1. So, we had consumed only one month's increase in quarter one and we had two months impact left to be consumed in quarter two. So, we have taken that impact and even after taking that impact we have kept the margin in a narrow band in quarter two. So, quarter two has been a very satisfactory performance. Now as we look forward as you are aware we don't guide on the margins but if you look at the way we have performed over last few quarters we have been able to keep it in a narrow band and as we go forward we feel confident that we have sufficient levers that if we execute well we should be able to keep it in a fairly stable region our margin outlook and that is how I see it going forward.
Q: Last quarter when I spoke to you, you indicated that there was an upside to utilisation and there was room to be able to inch up utilisation above 70 percent odd. It is at 69.5 percent. I know that little bracket of 69.5 percent when will you be able to go back to the 71 percent level?
Kurien: The answer to that is pretty simple. I don't think we are expecting to do that in the short term. The reason is that one of the big changes that we tool in terms of decision over the last quarter was to start retraining a large bunch of people that we had today from legacy skill sets to digital skills. So, this year we have clearly guided that we are going to train 10,000 people. That is a conservative estimate, we may end up doing more but while we go through this period of retraining we are going to take hit on utilisation. Having said that we have enough levers in our repository to make sure we are able to manage the margin. So, that is broadly what we are planning to do. So, I don't think we should expect a big uptick in utilisation over the next quarter and as we go through the next two quarters you would see that improving.
Govil: Just to add to that, you are right and I had mentioned this. We had seen three quarters of continuous growth and this is a very conscious decision this quarter where we had made investment, we have increased our hiring, you have seen 6,000 plus adds primarily to drive, as TK said, looking at making the investment in our digital investment and training people. And as TK has called out 10,000 people to be trained it is a very conscious decision. So, that is the way you should look at it and long term very clearly headroom to move forward as TK mentioned.
Q: So, for the next two quarters you will stay within that 70 percent range or below?
Govil: On a very small band.
Kurien: Yes, on a small band.
Q: I wanted to understand from you, the top client continues to be under pressure and this is something you had indicted would bounce back in this particular quarter. In the next two quarters will we see the pressure on your top client gradually bouncing back?
Kurien: I see the top client pressure continuing till the end of quarter four. We see it bouncing back probably in quarter one. Last time when I made that comment I was reasonably certain that we would do that. Unfortunately it has not happened and we expect to see that bouncing back not earlier than Q1 of our fiscal.
Q: So, it would be fair to see that the next two quarters are the most sluggish or rather the performance will be more sluggish across IT industry versus the last two years. In that case tell me specifically what are the key pressure points that you are watching out for, is energy one of them?
Kurien: Here is what it is. From our perspective we don't necessarily see it that way because the way we see it is that we have won deals, especially consolidation deals, new deals and as we go through the process of liquidating that we expect to see revenue coming back. But more importantly there are some sectoral issues we had most of last year and which has been the oil and gas segment. We have seen the oil and gas segment kind of bottom out, we will probably see marginal growth coming back in the next two quarters and then we will see a significant bump up after that. That is at least our estimate the way we see market kind of evolving. So, overall I would say that probably I am a little more bullish about oil and gas than I was maybe about a quarter ago.
Q: Energy was a key vertical to you but we have now seen one of your closest competitors Infosys making a large energy acquisition. Is the market now getting tighter because there was a point when Wipro was a clear leader but there is evident competition now?Dalal: Fundamentally we retained the market leadership position in energy vertical. In fact if I may suggest that we did an acquisition of much larger scale in 2011 when we acquired the energy oil and gas vertical of SAIC in June 2011.In fact the benefit of that has been clearly spelt out in the tougher times where we have consolidated out our competition and retained the market share and wallet share. Within energy vertical even when the total pie was shrinking we were acquiring market share. So, I think we remain a very strong positioned player in energy segment. I am reasonably confident as the money starts coming back into the sector sooner than later we would benefit disproportionately compared to other players.Q: Can you break up attrition for me in this particular quarter because we don't have the exact figures with us and what is the outlook because next two quarters are seasonally weak. Would attrition inch up further in the next two quarters? Govil: Attrition for us for LTM basis is flat or marginally down. If you look at over a six quarter horizon we have been operating attrition in a very narrow band of a percent plus. As far as Q3 is concerned seasonally it is a slow quarter from attrition perspective. So, we see that it will be a better quarter for us than what it is in Q2. I am very confident for the full year also and we don't guide it but it will remain in narrow band. Q: You indicated in the press conference that there is evident pricing pressure in large contracts. Will that continue now, is that the new normal?Kurien: Absolutely. I think comparitence is a new normal. Fundamentally what will happen is that all of us in this particular segment as we start eating share from some of the global majors, you are going to find pricing pressure coming in. I think the beauty of our business is that we have enough levers today to make sure that we keep margins where we want it to be. So, that is the positive. The headspace that we have is much more than the headspace that many other competitors have primarily driven by huge push into automation. Just to give you an example, last half year we have taken out almost 3000 people from our existing base who we are now retraining on digital technologies and we just think that we have scratched the surface as far as productivity is concerned. There is lots of headspace available as far as that particular lever is concerned. Q: Would it be fair to say in that case that in the next 2-3 quarters pricing pressure will continue and by when will it rebound?Kurien: I don't think it will ever ease out of commoditised business. Market has actually segmented itself into two very clear areas, there is the transformational digital deals which are out there. On that segment we see no pricing pressure, that is about creating a value proposition proactively and selling it to the customer. There is almost zero pricing pressure on that end. Then there is the regular services that all of us use to sell for many years where clearly we see people are going after that segment and pricing is one lever that they are using primarily because the differentiation in that segment is very minimal between companies. So, that segment is under pressure, the second segment is under pressure, the first is not. So, if you look at Wipro itself as an organisation last quarter our pricing has actually gone up last quarter. So, from that perspective I would just kind of build in enough into the runbook business that we carry to make sure that we have enough costs levers to take out costs on a regular basis and get us to be more productive.On the other hand whatever money we make here, we must reinvest that money on the digital side of the business to make sure we give that business a fillip when that business really starts taking off. So, that is broadly in the strategy.Q: Europe has been low from the last two quarters, by when will that bounce back?Kurien: The minute oil prices come back and we start getting our growth back in oil and gas, that is when Europe will be back.
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