Wipro Limited
Q2 2020 Earnings Call Transcript

Published: 15 Oct 2019

[Operator:]

Ladies and gentlemen, good day and welcome to the Wipro Limited Q2 FY '20 Quarterly Investor Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions]. Please note that this conference is being recorded.I now hand the conference over to Ms. Aparna Iyer, Vice President and Corporate Treasurer. Thank you. And over to you.

[Aparna Iyer:]

Thank you, Stanford. A warm welcome to our Q2 earnings call. We will begin the call with business highlights and overview by Abid, our Chief Executive Officer and Managing Director; 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 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 made available on our Web site.Over to you, Abid.

[Abidali Neemuchwala:]

Thank you, Aparna. Good evening and good morning, ladies and gentlemen. I’m joined here by my leadership team and it is a pleasure for us to speak to you.Let me quickly provide you an update on the Q2 performance, our view of the demand environment and the progress on our strategy. We had a good in-quarter execution on both revenue and margins considering the slow start that we had this fiscal year. Our revenues grew by 1.1% in constant currency terms at the midpoint of our guidance range. For H1, our growth was 4.8% year-on-year in constant currency.On the demand environment, in BFSI we have a strong set of offerings and a robust pipeline of digital deals. The growth, however, has decelerated due to the softness in spend by banking and capital market clients and the completion of large digital transformation projects.In line with our expectations, our consumer business grew well at over 6% year-on-year on the back of good deal wins. Energy and utility segment grew 6.3% year-on-year in constant currency. The global business in communication grew at double digit year-on-year while the India piece of communications remained volatile impacting the overall growth of the communication segment.We see early signs of recovery in both manufacturing and health. We see an uptick and the demand for health outside of HPS, our subsidiary that services our ACA clients and we’ve had some good wins in this digital space in the healthcare clients.The demand environment remains unchanged from what I had shared last quarter, though there continues to be an overhang of macro uncertainty in certain sectors. Our U.S. growth has been pretty strong while Europe continues to be weak.We continue to see a robust pipeline and the momentum of order book in Q2 has been better than Q1 and some of the deals that we had mentioned were delayed. Signing in Q1 have been signed in Q2.The restructuring of our India and Middle East business is going very well and it is reflected in some of the deals that we have announced, like the large deal with ICICI Bank. We have delivered operating margins of 18.1% in Q2, which is comparable to 18.4% in Q1 after absorbing the incremental impact of wage hike for two months and investing in bench for growth.Our margins year-on-year have remained in a narrow band adjusting for the one-time impact for the customer settlement in Q2. Earlier this year, we sharpened our strategy into four pillars of business transformation, modernization, connected intelligence and trust, which is enabled by talent engineering, IP as a platform and open innovation.In order to deliver on customer needs across these four areas of our strategy, we have been investing on building capabilities in digital cloud, engineering and cyber security and risk services. I’ll give you some updates on each one of these four big bets.Our global investment in digital have created the requisite presence, experience and scale to support transformation not just in our core markets where it started but also in the emerging markets. We are winning integrated transformational deals in Canada, Australia, APAC, and of course we continue to win deals in U.S. and UK.In digital, our revenue grew 7% quarter-on-quarter and now digital contributes just under 40% of the company’s revenues. For example, in Canada, we are working with a midstream energy company on their digital transformation journey to significantly enhance the working experience and job satisfaction of its field force while substantially improving worker productivity and effectiveness.In Australia, for a telecom company, we are enabling the customer experience transformation across the B2B value chain. And in Southeast Asia, we are working with a government health ministry to lay the foundation of their ongoing transformation leveraging digital for citizen services.Second is cloud. Our business first approach to cloud adoption and building domain centric solutions with our cloud service providers as our partner have made Wipro a preferred cloud transformation partner for many of our customers. We are heavily invested in cloud studios to help our customers move to cloud at an accelerated pace. It includes lift and shift, refactoring of applications, re-platforming and moving to truly agile and DevOps to leverage this power of cloud in a highly automated and industrialized approach.Our strength of our offerings and market presence and success is acknowledged by many industry analysts in their reports. As an example, a global U.S. lifestyle apparel company has partnered with Wipro for a large transformation program after the company was spun off into a separate publicly traded company. The client chose Wipro as the strategic partner to establish a highly secure and scalable architecture, leveraging our cloud studio offerings.The third is engineering services where we have revamped our engineering services offering and re-launched Wipro's Engineering NXT. Engineering NXT continues to deliver these services by leveraging our innovative IP-driven solutions, rigorous engineering processes and new age crowd sourced and global shore delivery models.Historically, Wipro's engineering service practice as you may be aware was quite focused on the tech vertical. With Engineering NXT we are expanding our services across many more verticals where we are seeing some very good traction. As an example, a U.S.-based global medical device leader has awarded Wipro a multimillion-dollar deal to enable compliance with the European Medical Regulatory norms leveraging expertise of Wipro Engineering NXT.And the fourth big bet is cyber security. We are focused on building cyber defense assurance platform and expanding to IoT security practice to address demand due to expanding attack surfaces with connected systems. Cyber security service offering grew 16.6% year-on-year in Q2.As an example, a large U.S.-based bank has selected Wipro to bolster its cyber security defenses and address issues identified during various internal and external audits. Wipro will design and implement appropriate security controls, besides providing incident management and support optimization of the existing risk and control self-assessment process of the bank.As you are aware, we have made a number of venture investments from Wipro Ventures in this space, which are all leveraged to provide the services. We continue to focus on client mining and drive digital and business transformation in accounts that bring together design, domain and consulting capabilities and help us engage in strategic conversations proactively with clients and various business stakeholders within our accounts.As an example, a leading North American bank with whom Wipro has strategic relationship has awarded a multiyear application development and support contract which is the entry of a new service line cross-selling into this account aimed at getting products to market faster and improving customer experience.Our strategy that I articulated is supported by our M&A, our IP platforms, talent re-skilling and localization across the markets that we work where we continue to remain very focused. We are building a robust pipeline of large deals proactively to meet our ambitions of growth.In an environment with ever-changing technology, people remain our primary assets. Our voluntary quarterly annualized attrition rate has dropped from about 17.9% to 16%. We continue to drive localization and now U.S. is just under 68% local workforce for us, and we continue to do campus hiring, deepening employee engagement and make significant investments in training and re-skilling our workforce.On automation, the work done by bots in fixed priced projects has improved from 15.3% in Q1 to 16.5% in Q2. In conclusion, despite the current macro environment, we continue to see an improving quarterly growth trajectory which is reflected in Q2 performance and Q3 guidance.I will now request Jatin, our CFO, to give you an update on our financials.

[Jatin Dalal:]

Thank you, Abid. So as you all know, we have come at the midpoint of our guidance. Our margins have remained stable, above 18% at 18.1%. As you know, there were tax changes which happened during the course of this quarter whereby we had our ETR at 18.3% this time. This and the one-time impact we had taken in quarter two of last year has resulted into the overall profit growth of 35.1% and an EPS growth of 36.7%.If you see our Forex hedges, we have 2.7 billion of Forex hedges. Our realization rate for quarter two was 71.56 compared to 70.39 in quarter one. We continue to create and convert good cash of our business. Our operating cash flow was 107% of our net income in quarter two. We have guided for quarter three 0.8% to 2.8% sequential growth.And we'll be happy to take your questions from here.

[Operator:]

Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. The first question is from the line of Mukul Garg from Haitong Securities. Please go ahead.

[Mukul Garg:]

Thanks for the opportunity. I’d first want to just understand the decline which we have seen at the top client this quarter. Now in your meeting too you mentioned that this was basically end of couple of projects. So was this in line with your expectation? When can this come back or are you still seeing a pause in this spend at the top client?

[Abidali Neemuchwala:]

So, Mukul, as you know, we’ve had quite a good success in driving digital transformation in the banking and financial services sector. Our top client happens to be a bank and we’ve been doing a lot of digital work for them. Given the current macro uncertainty, as some of our projects got over there in digital, we have seen a little slowness on renewal of some of those projects in terms of the next phases of the digital programs. I personally believe it’s more a matter of time when it comes. Normally some of these digital programs are done in multiple sprints and every sprint we would get an SOW for the next sprint on a continuous basis. This time there has been a little bit of slowness in this, but the intent for the client to spend has not gone away. It is more a question of the spend restarting. Also, there are a couple of programs which successfully got completed and the new programs that we were expected to get started haven’t got started in that same client. So both of these factors have created softness in our top client.

[Mukul Garg:]

Understood. And the other part of the question was, was this something which you anticipated at the start of the quarter or was this a bit of a surprise and if you can kind of expand this to also include the rest of the outlook on the BFSI vertical? Are you seeing weakness across the board?

[Abidali Neemuchwala:]

Yes. So we are seeing weakness in the BFSI vertical. And as you notice we have come in the middle of our guidance range which means that we have built this uncertainty in our guidance, so it has not come to us as a surprise but we would have been happier if this slowness would not have played out, we could have come higher the middle of our guidance range. So that is why when we give the guidance as a range, we incorporate some of these uncertainties. So I wouldn’t call it a surprise. It is something that we anticipated and it played out.

[Mukul Garg:]

Understood. The other question was on top 2 to 5 clients, that has also seen a decline of about 5%. So what sectors are you seeing the impact coming in or is this also a client specific correction this quarter?

[Abidali Neemuchwala:]

No. I think in our top clients, almost 50% of our top clients are in the BFSI segment. So I think the answer is more that some of these clients are also seeing the same macro impact that our top client has seen. If you notice for the last many quarters we’ve grown double digit in our top 10 client segment far higher than the company average and this time we’ve grown about 7.4%. So the other clients have done well but the softness is visible in the bank and financial services clients.

[Mukul Garg:]

Understood. And if I can squeeze in one final question for Jatin. Given this quarter’s margin management was quite impressive. You had a wage hike of lower utilization and good employee addition, but still you have kept margins broadly stable. Is this something to do with a better pricing or hyper-automation? What really helped you guys?

[Jatin Dalal:]

So I would say this was the quarter in which we were able to drive cost optimization from some of our lines which is visible in the P&L. Some of our marketing events are concentrated in quarter one. Those did not recur, so we go some upside on those spends. We executed well on collections, so PDD were lower. We also got certain benefits on certain cost lines which we were able to generate as an upside to margin. On the other hand we used this to invest on some of the bench which we believe will be critical for us for our growth. We had two months impact of wage hike which also I would say is an investment in people. And lastly, we have spoken about our big bet investments and some of those big bet investments have been made to create additional capabilities on domain, solution building, architecture sites. Those have also sort of been invested in and that have adversely impacted margins. And within these two we were able to keep the margin in a broadly narrow range.

[Mukul Garg:]

Understood. Thanks for answering my questions. I’ll get back into the queue.

[Operator:]

Thank you. The next question is from the line of Moshe Katri from Wedbush Securities. Please go ahead.

[Moshe Katri:]

Thanks. Looking at your guidance for the next quarter, is there any contribution from an acquisition, so i.e. is the guidance purely organic or is there anything else beyond that? And then on top of that, can you talk a bit about the pluses and minuses that kind of resulted in your margin decline sequentially? Thanks.

[Jatin Dalal:]

Sure. So there is approximately – we completed an acquisition of ITI on 3rd of October that will flow through in our revenue for quarter three. The contribution of that is likely to be around 0.3%. That is factored in our guidance. The other question which you asked, our margin had really three components. We had one-time benefit in form of other operating income of 0.5 in quarter one which did not recur in quarter two. All the investments on bench, salary increase and big bets we made was adverse 1.1%, so that was also negative. The cost optimization we were able [indiscernible] gave us a benefit of 1.2%. So if you add up those numbers, you will see the movement from 18.4% of quarter one to 18.1% in quarter two.

[Moshe Katri:]

Thanks, helpful. And then just last question. Are some of the trends that you’ve seen in financial services, I’m assuming these continue beyond the close of the quarter, the question is whether they are kind of getting worse in turn with some of these kind of uncertainty related to the overhang or they kind of remain consistent, i.e., are you continuing to see delays? Are these accelerating, getting worse? Any color there would be helpful. Thanks a lot.

[Abidali Neemuchwala:]

So, Moshe, this being the last quarter for a lot of the financial services, as you know some of the financial service organizations have also started doing furloughs, like the manufacturing and tech organizations. So for at least Q3 I would say it will be same or slightly more worse because of the furlough. I’m hopeful of an uptick once the IT budgets are decided, I will be able to give a better picture which in the best case would be around end of the year, but normally in the last couple of years we’ve seen we get clarity only early next year.

[Moshe Katri:]

Understood. Thanks a lot.

[Operator:]

Thank you. The next question is from the line of Divya Nagarajan from UBS Global Asset Management. Please go ahead.

[Divya Nagarajan:]

Hi. Thanks for taking my question. You spoke about a few banking wins. Could you kind of talk about where these wins are coming from? Is it from existing clients? Were you gaining market share? And if these were market share gains, are you getting it from in-house deals or is it coming from third party service providers?

[Abidali Neemuchwala:]

So, Divya, we are having wins – one of the wins as I mentioned is ICICI Bank in India which is a new client for us. We continue to win new clients in the U.S. market as well. They are pretty much in the mid-tier bank space. And then we continue to get win projects in existing clients. As you know, over the past couple of years we’ve had significant market share gains in the BFSI space. This quarter, our overall BFSI revenue would be about 31%, which was about 5% or 6% lower just a couple of years back. So that has been because of market share gains.

[Divya Nagarajan:]

Okay. I know we don’t really guide on margins but given that we’ve had fairly decent margins despite the wage hikes, what kind of a trend should we be looking at for the rest of the year? And assuming that you do get growth at these levels because we’ve been stuck in this early single digit organic growth range for a while now, how much more leverage is there for us in terms of margins from here on?

[Jatin Dalal:]

So, Divya, like I mentioned in beginning of quarter two that our priority as an organization remains growth and we will remain invested in the commitments we have made on big bets as well as we will remain committed to some of the work we have done on building right capabilities in form of bench, et cetera. That commentary remains and it will remain consistent with that, so I don’t want to guide for margin for quarter three, quarter four but I do want to say that we have managed it in a trajectory so far and our endeavor would be that we don’t let go of margins. But we will not hesitate to invest if there is a need to invest if it gives us revenue growth in two quarters from now for example.

[Divya Nagarajan:]

Thanks and all the best for the rest of the year.

[Operator:]

Thank you. The next question is from the line of Vibhor Singhal from PhillipCapital. Please go ahead.

[Vibhor Singhal:]

Good evening and thanks for taking my question. So, Abid, my question to you was majorly on kind of growth that we have seen in this quarter. So I think after a long period of time we’ve kind of seen the broad-based growth which you also mentioned in the opening remarks, though it is still I would say below the industry average but I think we still are getting there and the key verticals of healthcare, energy and utilities which were dragging the growth down seem to be coming up in this quarter. So just wanted to check with you on the sustainability of these numbers? In banking of course as we know that the top line is declining and because of overall weakness we’re also seeing that kind of a weakness. But in terms of let’s say healthcare as you mentioned outside HPS in E&U and even in telecom, the kind of positive growth on a y-on-y basis that we are seeing, how sustainable are those numbers?

[Abidali Neemuchwala:]

So I’ll go vertical by vertical. Banking has been industry leading for us last few quarters but right now we are seeing softness. We’ll continue to monitor the macro environment on the BFSI space. In communications, I feel pretty good. Our global business has delivered double-digit growth. The numbers that you see of about 2.4% in constant currency year-on-year are diluted numbers because of what is happening in the India market where we have a very large share in the communications segment. I feel quite good – continue to feel good with the consumer sector as we’ve done well including this quarter. And similarly in energy and utilities I think we are making the right moves. There are certain uncertainties that we’ll have to watch out in terms of projects getting over and new projects which are likely to start, but we have had a good quarter. And on a year-on-year basis as you see we’ve grown well, except for macro and the time sometimes it takes between two projects. I feel pretty good on E&U. Health, as you rightly pointed out, outside of HPS and you know HPS we were de-growing for a long time. I think it has now flattened, which essentially means that although HPS will have a denominator effect, but we are winning well in the rest of the business and hence we will continue to see growth in the health vertical. Manufacturing, we are still undergoing our restructuring and rejuvenation of that business. I see strong pipeline. Some of the bets we have made as I’d outlined around engineering, around IoT, some of the ADAS and others in the auto industry, we are doing a lot of engagements, pilots with customers. So I’m quite hopeful of a turnaround in that business, but I would give it a couple of quarters. Technology, we do see a little weakness in the silicon side of the business. We do a lot of work with tech companies. There are a couple of customers where we had had customer specific issues because of acquisitions or challenges with those individual customer organizations. But overall we have got good pipeline and good set of deal wins in the technology vertical. So overall, I do believe that we’ll be able to maintain secular growth and we’ll have to take it one quarter at a time. On Q3 I feel quite good. And as we progress, we will keep you updated.

[Vibhor Singhal:]

If I could just harp a bit more on two specific verticals, one is on the consumer vertical. I think as per now if you see your couple of peers reported numbers have actually reported quite weak numbers in the retail segment and have also cautioned in terms of future outlook because of the ongoing global trade war that clients are deferring their spend. Do you also foresee that kind of scenario playing out that might impact our consumer business? And in BFSI if I just may scratch it a bit more, how close to bottom do you think – how close to bottoming out do you think we are in terms of our top client?

[Abidali Neemuchwala:]

So I will answer the BFSI question and then I will let Srini talk about consumer. But I think a lot of the engagements so that they wanted to pause have been paused, so I feel quite good about the top client now. So we should have – we would wait definitely through Q3 and then we would have a commentary early in Q4 as we see their first quarter playing out and how the IT budgets get defined. I’m sure all of you are from the financial services industry, so you’ll have an insight on that as well. On consumer, we’re doing pretty well because like BFSI we have led through our digital proposition and every part of the consumer business is digitally transforming itself, so I feel good and I’ll let Srini give a little more color to our consumer vertical.

[Srini Pallia:]

Thanks, Abid. I agree with you especially on the retail side of the business it has very strong relation to global macro indicators and obviously that reflects in some of our customer spends. But if you look at our large – one of the largest markets for retail in the U.S., for example, there are mixed signals whether you talk about the interest rate or a trade or an employment. But having said all that as far as we are concerned, we see traction like Abid talked about helping our customers reinvent their business and operating models with the digital first approach. I think that has been very key for our customers and most of all our retailers. They are investing in areas where they want to differentiate from their competition. So the classic omni-channel customer experience are definitely the focus area. And some of the engagements that we have had with our customers is around the software re-imagination, also the customer journey mapping which is becoming very, very critical for us. So the whole aspect of customer convenience whether it’s return management or reverse logistics, those are some of the areas that we are kind of getting engaged with and also with consumer brand companies, right, they’re driving DTC and what I mean by that is direct to consumer. And in some of them I think Abid called out one of the wins that we had this quarter, we are setting up a greenfield technology and creating operating platforms. So it’s all about building a state of the art digital footprint and also modernizing their entire IT landscape across application, infrastructure and security. This actually we’re doing for a large global apparel company. And some of the things we’re doing is very creative stuff, leveraging our cloud sourcing. We actually – one, this has also been talked about by Abid. We’re doing a cloud powered AI and data consulting engagement for one of our large customers which are more into retail and distribution as well. So broadly, retail as an industry is going through transformation, also sometimes turbulence and the way we see it as the challenges, so for example if you look at the sub-segments, the challenges of fashion retailers we see is very different from a grocery retailer or if you look at the priorities of account retailers from an online retailer, it’s very different. With both retailers they have their own challenges, they have their own strategist to counter this turbulence. So it’s an interesting time from a technology point of view to help ride through the wave, if you will, for the consumer industry across retail, CPG and others. So that would be my short answer to your question, Vibhor.

[Vibhor Singhal:]

Sure. Thanks, Srini. So if I were to summarize, is it okay to say that given the mix of our clients in the retail segment, I know projecting long-term is difficult but at least given the mix of our clients, in the short or the very near term we don’t see any significant headwinds in the retail segment?

[Srini Pallia:]

I would agree with Abid’s comments.

[Vibhor Singhal:]

Sure. Thanks a lot. Wish you all the best.

[Srini Pallia:]

Thank you.

[Operator:]

Thank you. The next question is from the line of Shashi Bhushan from Axis Capital. Please go ahead.

[Shashi Bhushan:]

Thanks for taking my question. So we have gone through the restructuring in Middle East and India business over the last few quarters. In that context can you please tell me what was the rationale behind Vara Infotech deal and what actually was the value for reason of that deal that attracted us to the asset?

[Abidali Neemuchwala:]

So as I’ve said before, we have and we had market leadership in both India and Middle East but over time the kind of services that we were providing did not fit the overall company strategy, which was essentially as you know around driving digital and these markets are very rich opportunities for digital. And they were focused more on commodity business. So we put together a new team about a year, a year and a half back. We gave some investment to the team. We gave them the ability to finish the projects that we had already taken successfully for our customers and then pivot the business into the new areas aligned to our strategy. And the second thing that we wanted to do is historically Wipro had a separate what used to be called as Wipro Infotech, a separate brand and a separate entity to service India and Middle East whereas we saw that there is much bigger opportunity to be able to bring the global expertise into this part of our business to be able to be successful over here. And the ICICI deal that you referred to is a great example of vindication of that strategy, because as banks or other enterprises truly adopt what I would put under digital India, there is a lot of experiences that we can bring from the global markets which may or may not be getting from their current providers. So that is why they’ve signed a deal with us with a revenue commitment so that we take over their current landscape and then drive the transformation that they want to undergo and bring the might of Wipro from all of our investments across digital, across cloud, across the Wipro Ventures, innovation and so and so forth. So while it is early days and we are just embarked on the engagement and right now through the asset transfer and people transfer, we are integrating that. But there is a roadmap for transformation that will bring a value to our customer as well as give us an opportunity to build a platform through which we can bring those services across the many other Indian banks and other customers. So that’s a good pilot example of how we are executing on our strategy and vindication that customers see value in that strategy.

[Shashi Bhushan:]

Some pretty interesting stuff. You said that deal pipeline in Q2 is stronger than that was in Q1. Any quantitative color for the same would be helpful.

[Abidali Neemuchwala:]

While the pipeline is stronger, I talked about the order book was better in Q2 compared to Q1. So if you recollect in Q1, we were a little surprised because some of the deals that we were declared as being the winner by the end of Q4 or during Q1, there were inordinate dealers in signing those deals. I think some of that was a reflection of the macro uncertainties where customers were taking a little longer. We were fortunate that a large part of those deals got signed in Q2 and that is also reflected in our Q3 revenue guidance as some of those deals will start delivering revenues to us in Q3.

[Shashi Bhushan:]

On the margin front, we have shown commitment for investment in some of the newer areas and newer strategic initiative. So where are we in terms of investment and was there any impact of the same in this quarter also?

[Jatin Dalal:]

That is right, Shashi. We have said that we have focused investment in these four spaces. We have not called out either percentage of margin every quarter how much we have now incrementally added to it. But one data point itself is visible on data sheet both in terms of, of course, the bench and utilization number. But if you also see the sales and support headcount, there is a significant addition there and some of that is for the big bet. That number remains – it goes up and down, but this quarter you will see a meaningful increase in that number, Shashi.

[Shashi Bhushan:]

Okay. All the very best for the rest of the year. Thanks.

[Abidali Neemuchwala:]

Thank you, Shashi.

[Operator:]

Thank you. The next question is from the line of Sandeep Shah from CGS-CIMB. Please go ahead.

[Sandeep Shah:]

Yes. Thanks for the opportunity. Just one clarity, Abid, just wanted to understand within the top client, is it fair to say most of the ramp downs is done and over in the Q2 and you believe that you have to wait for Q3 in terms of an uptick or you still believe there is some tailor pending in terms of the ramp downs into second half?

[Jatin Dalal:]

So, Sandeep, as Abid commented earlier, this segment of customers is difficult to predict in the last quarter of the year. So I would not hazard a guess right now. We of course have an indication, but we will see how the quarter pens out. Right now I would say is still uncertain outlook where exactly it will end at the end of this quarter.

[Sandeep Shah:]

Okay. And just further to that, is it these ramp downs started at the end of the quarter or is that being start from July itself?

[Jatin Dalal:]

Sandeep, I wish we could share that many details but you can see that if it does impact revenue for the quarter that it is certainly not the end of the quarter ramp downs.

[Sandeep Shah:]

Okay. And Jatin just few things. If I look into the cost line item of miscellaneous expenses, it has come down significantly from a quarterly average of 150 crores, 190 crores to as low as 70 crores. So most of these savings are recurring or how should we look at it, because your sales and marketing expense ratio is at multi-quarter low, even your G&A expense is at multi-quarter low. So how to model those expenses going forward?

[Jatin Dalal:]

So I think the right way to model would be that they would go back to their run rate numbers. Some of this cost savings are because we have put additional effort, for example – I will come back to miscellaneous. For example, PDD is lower because we have indeed done very well on our collections in certain part of our government business in India as well as we have done very well on our collection in certain parts of Middle East business and that has resulted in our provision for doubtful debt being reversed and that has given us an uptick in G&A line. Miscellaneous expenses was certain cost credit that we could see it coming and we have invested that as part of the people cost, bench investment that we think were right to be invested in the current quarter. While this cost will come back to their normalcy to a great extent I should say, but we won’t be able to use the lever of the utilization of our pyramid and most importantly our automation which we spoke about in our press conference to manage our margins going forward.

[Sandeep Shah:]

Okay. Jatin, just wanted to understand what does exactly mean the cost credits, why these line items remain volatile on a q-on-q basis, just wanted to understand that?

[Jatin Dalal:]

Yes. So these are – on an ongoing basis you are carrying certain costs. And when you make an assessment that certain costs as an expense line you need not carry for this quarter, you no longer take the provision for that or you have a reversal regarding that. That much I can share with you.

[Sandeep Shah:]

Okay. And last thing in terms of the provision for doubtful debt reversal, because is it more linked to the ISRE business because that business loss has also come down significantly or it’s also equally split between IT service and the ISRE?

[Jatin Dalal:]

This is both, ISRE as well as the Middle East which is part of our global items.

[Sandeep Shah:]

Okay. Thanks and all the best.

[Operator:]

Thank you. The next question is from the line of Ashwin Mehta from IDFC Securities. Please go ahead.

[Ashwin Mehta:]

Yes. I had one question in terms of the effective tax rate. What should we model in for FY '20 and '21 going forward?

[Jatin Dalal:]

Ashwin, can you repeat?

[Ashwin Mehta:]

Yes. I want to get a sense in terms of what the ETR would be for FY '20, '21?

[Jatin Dalal:]

I think it will be – we are still studying the tax proposals, but I would say that between 20% and 21% would be a good estimate at current point in time.

[Ashwin Mehta:]

Okay. And secondly in terms of your S&M cost given the sales and support headcount increase, that’s one cost item which has actually seen a reduction over a period of time. Do you think this will possibly get elevated going forward to drive the growth or these are more sustainable levels that you’re working with?

[Jatin Dalal:]

Yes. So these are from – I would say from an S&M standpoint there will always be some quarter uptick or some quarter reduction because there are certain marketing spends which remain lumpy in our business. Now I would correlate that with the sales and support headcount which is higher, but a lot of that support headcount is really part of our cost of goods sold and not part of S&M because these are – many of these investments are people who do both presales and delivery and therefore they are classified as cost of goods sold and hence it is difficult to correlate the sales and support line as an aggregate with just the S&M number.

[Ashwin Mehta:]

Okay. So as such from an S&M perspective, there doesn’t appear to be a material uptick expected there?

[Jatin Dalal:]

That is right.

[Ashwin Mehta:]

Okay. Thank you and all the best.

[Operator:]

Thank you. The next question is from the line of Dipesh Mehta from SBICAP Securities. Please go ahead.

[Dipesh Mehta:]

Thanks for the opportunity. Two questions. First on the geographic wise if one look at Europe and the rest of the world, now weakness persist for both the segments which is roughly 40 percentage of our revenue. If you can help us understand what is leading to persisting weakness in these two geographic and how you expect it to play out over near as well as medium term? Second question is about the segmental margin which we report in BFSI and communication, if one look at segmental margin, we have seen some weakness in segmental margin of these two verticals. If you can provide some perspective despite doing well in communication side and even mix is some kind of favorable shift towards developed markets, it seems to have some weakness on the margin side? Thank you.

[Abidali Neemuchwala:]

So I’ll answer the first question and then I’ll let Milan and Angan address the margin question for the segments. So essentially in Europe, primarily the uncertainty around Brexit is one area and second is the overall impact of – we have a lot of banking and capital market customers in Europe. So both of those – the intersection of those two are contributing to the weakness that you see. These are all part of some of our large accounts. So while we have robust new accounts being added over there, but some of the drops coming from there are resulting into a negative growth that you see in Europe.

[Dipesh Mehta:]

Abid, by when because it is now for some time, so now do you expect because we expect some of the top account closure to bottoming out, but do you expect lately now Europe should turn around in next couple of quarters for us?

[Abidali Neemuchwala:]

Yes. Our base business in Europe is still coming from some of the banking and financial services customers. I don’t know – as we answered in the earlier question for the top customer, we don’t know how next year will pan out. So I would kind of go quarter-by-quarter. As I said, our new deal wins is quite healthy. For example, we won a banking client in Germany which is a mid-tier customer in the last quarter. There are other wins we’ve had. But as you know, some of these wins start small and then grow over time whereas when we have some of the ramp downs in the larger banking and capital market accounts, they’re quite significant and that reflects on the number that you see over here. So I would still – anything to do with getting impacted through the BFSI space I would just keep watching quarter-on-quarter. Milan?

[Milan Rao:]

Yes. On the communication side, in general we have seen a strong growth in the global side of the business. And as Abid articulated there was some weakness on the India side. The weakness on the India side was also from the margin perspective and therefore that is what is impacting the overall number. On the global side we do not see any significant challenge on margins.

[Angan Guha:]

And on the BFSI side, because the revenue has decelerated over Q1, we have seen certain impacts on margin. So we’ll have to watch this space over the next couple of quarters how the revenue shapes up and only then we will be able to comment in terms of how the margin looks.

[Jatin Dalal:]

And as you know for the global business the employee base is quite re-deployable, so some of the deals that we would get for example in the consumer segment, a lot of the digital resources and data resources from BFSI are re-deployable. So in the short term you see a margin impact. Over a medium term we are able to repurpose and redeploy the deployable bench.

[Dipesh Mehta:]

Good. And last just clarification, in BFSI do we see weakness also in U.S. side or it is largely Europe for us?

[Angan Guha:]

So in BFSI the weakness is more in Europe than in the U.S., but if you look at sector – from a sector perspective I think it’s more on the capital markets side.

[Dipesh Mehta:]

Understood. Thank you.

[Operator:]

Thank you. The next question is from the line of Abhay Moghe from Bajaj Allianz. Please go ahead.

[Abhay Moghe:]

Good evening. The question is to Abid. It’s been almost four and a half years that you joined Wipro. Now you have had some unfortunate experiences like HPS acquisition or client bankruptcies and some fortunate things you and your team were able to execute good on the BFSI and some good acquisitions like Designit or Appirio. My question is what’s your point of view on where you are in an overall journey to bring Wipro to industry leading growth, like it’s near term, you can see it happening in the next two quarters, one year or you think no it’s still sometime away and maybe some problems like they’re so ingrained that they may take quite a while to resolve? So what’s your point of view?

[Abidali Neemuchwala:]

So I don’t see any problem that will take quite a while to resolve. I think we clearly articulated a strategy. We relentlessly are executing on that strategy. We are seeing good results on that strategy whether it is on building capabilities as you rightly mentioned, we both acquired and organically built capabilities that make us quite futuristic in areas like client mining and account execution we made significant investments. Our client satisfaction to date is one of the highest in our history, so I feel quite good about it. I think what we need to continue to do is relentlessly execute and make sure that even in some of the macro spaces there’s always an opportunity in some of the slowdowns in some of the economic cycles and we need to just make sure that we make the most of those opportunities.

[Abhay Moghe:]

Okay. Thanks.

[Operator:]

Thank you. The next question is from the line of Girish Pai from Nirmal Bang. Please go ahead.

[Girish Pai:]

Thanks for the opportunity. I just want to circle back to the margin question. Jatin, are you kind of implying that the 18 to 20.5 is like kind of peak margins because we mentioned that whatever savings you’re going to get you’re going to reinvest back into the business. So from a three-year perspective, would 18.5 be like the kind of peak margin that you’re going to see?

[Jatin Dalal:]

It’s difficult to call from a three-year standpoint. Our aspiration certainly would be to go beyond 18% and 18.5% range. My comment was vis-à-vis the fact that we had a certain visibility of cost credits and cost benefits that we were able to execute in quarter two which we have invested back. Some of those may not continue in quarter three but we will execute on other levers for quarter three. Also our overarching commentary on margin is that we have to remain invested to get the growth to a better trajectory. And once the growth comes as we all know, margin always follows. So that’s the overall hypothesis with which we are working with, Girish. Difficult to call out specific numbers or ranges beyond that.

[Girish Pai:]

Okay. My second question is probably a little basic. It’s true that we have realized INR rate I think for many years now Wipro has had a much higher realized rate in INR. What exactly is playing out there, is it just treasury or what exactly? Why are you getting rupee more than your peers in the market?

[Jatin Dalal:]

Girish, we can certainly explain the cash flow hedge accounting that we do. Maybe Aparna or Abhishek from IR team can explain that. We have remained very consistent with our hedging policy as I have articulated every quarter and that certainly has played out well for us. I am unable to compare with others but we can certainly explain the accounting methodology that we use for our segmental reports.

[Girish Pai:]

Okay. My last question is regarding pricing/gross margin in your digital business. How much more would that be because in your company level margin or say if you want to talk about pricing, how much higher would say digital services pricing will be, will that be your normal onsite pricing?

[Jatin Dalal:]

Yes. So, Girish, the pricing both onsite and offshore is definitely higher than the traditional services. However, this resource is also more expensive. We get into a better trajectory of margins as we get into larger projects and on a more sustained revenue stream. There are also I would say marketing or capability digital experience kind of investments that we have done in digital pods all over the world and some of that also reduce our profitability of our projects. But overall pricing is certainly significantly superior in some of the projects, superior in other projects.

[Girish Pai:]

Let me squeeze one last question in just regarding your order book, order inflow. In the last few quarters has it been more renewal type order inflow that you’re getting or it’s like net new kind of order inflow?

[Jatin Dalal:]

So we don’t break that out but if you reflect on the comment I made that there were certain deals which were delayed which have got signed in Q2 and we are starting new projects which is reflected in the revenue guidance that we have given, that is incremental revenue. So those would be new deals.

[Girish Pai:]

Okay. Thank you very much.

[Operator:]

Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Ms. Aparna Iyer for closing comments.

[Aparna Iyer:]

Thank you all for joining the call. In case we couldn’t take your questions due to time constraints, please feel free to reach out to the Investor Relations team. Thank you and have a nice day.

[Operator:]

Thank you very much. Ladies and gentlemen, on behalf of Wipro, that concludes this conference. Thank you for joining us and you may now disconnect your lines.