Wipro Limited
Q3 2019 Earnings Call Transcript

Published: 18 Jan 2019

[Operator:]

Good day, ladies and gentlemen. And welcome to the Wipro Limited Q3 FY19 Results 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 [Operation Instructions]. Please note that this conference is being recorded. I now hand the conference over to Ms. Aparna Iyer, Vice President and Corporate Treasurer, Wipro Limited. Thank you and over to you, Ma'am.

[Aparna Iyer:]

Thank you, Margaret. Wish you all a very happy New Year and warm welcome to our quarter three FY '19 earnings call. We will begin the call with the business highlights and overview by Abid, our Chief Executive Officer and Executive 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 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 Web site. Over to you, Abid.

[Abidali Neemuchwala:]

Thank you, Aparna and good evening, good morning, ladies and gentlemen. First of all, wish you all a very happy New Year. I’m joined on this call by my leadership team and it is a pleasure for us to speak to you all. It is yet another quarter of good execution by the team. Our performance in both revenue and margins has been robust. Let me quickly provide you an update on Q3 and our view of the demand environment and the progress on the six strategic themes that I talk to you about every quarter. In constant currency terms, our IT services revenue grew by 2.4%, which is within the guidance range. Amongst the verticals, our banking and financial services vertical and consumer vertical continue to do well. And along with the energy and utilities vertical, three verticals have grown over 10% year-over-year in constant currency. Technology has had a muted growth, which is normal in Q3, because of furlough but the outlook remains quite stable. Communication has grown well at 2.1% in constant currency. Healthcare is likely to remain soft as we overcome the uncertainty around ACA. The demand environment in the global markets is stable. We do not see any immediate impact of the micro headwinds that some of the large economies have cautioned, but we continue to remain quite watchful. The traction in U.S. and Asia-Pacific and other emerging market remains healthy, and the growth this quarter is across industry segments. India will continue to remain a little volatile as we undergo the restructuring and transformation of our business. We have expanded our margin significantly over the past two quarters, which has been driven by relentless focus on various operating levers and specially automation by our teams. We see some of this uptick being reinvested into our people and our big bets and strategic themes that we have been talking about. We remain committed to driving profitable growths and high quality of revenues. Now, let me quickly share the update on our strategic themes. Our digital revenue continues to grow strongly and increased 6.4% sequentially and 35.4% year-on-year in Q3. It now contributes 33.2% of our overall revenues. Our clients are increasingly drawing on the power of Wipro digital combined with Wipro's traditional business to deliver new product, services and experiences to their clients and employees. All of this is enabled by the digitally trade workforce, which now is over 130,000 employees. Just to give you an example of the kind of deals we are executing, a North America based publishing company has awarded a multiyear process simplification and user experience transformation contract to Wipro, leveraging our expertise in cloud, agile and Wipro digitals design centric approach through our Designit acquisition, we will optimize the client's global inventory and supply chain processes and enable and enhanced experience for clients and consumers. I continue to remain quite satisfied by our efforts on customer mining, and the results have been quite robust across all buckets, despite a quarter with furloughs, which primarily impacts our large customers. In Q3, our top 10 clients grew 6.3% sequentially in constant currency terms and 14% year-on-year, and our top five clients grew 9.7% sequentially and 19.1% year-on-year. We've added one client in the $100 million bucket, two in $50 million plus bucket and seven clients in the $20 million plus bucket. We continue to add various different service lines to our existing customers to drive this growth. This quarter we have one incremental business to an existing infrastructure customer and now we are servicing them in the data analytics and artificial intelligence space. This will see our existing footprint expand as the customer embarks on its 2020 focused transformation journey. On non-linearity, we continue to invest in intellectual property. And during Q3, we filed 60 new patents taking our total patent applied count to 2,113 with about 492 granted patents within our portfolio. And a large number of these patents are in futuristic technology areas around data analytics, artificial intelligence wireless technologies and so on so forth. We continue to execute quite well on automation, or what we call as hyper automation, essentially leveraging our IP, which is Wipro HOLMES platform, which is now in over 350 of our clients. The measure that we use to quantify our automation, which is work done by bots has improved in on our fixed price projects from about 3% work in Q2 to about 6.7% work in Q3. And our fixed price mix has improved to about 59.8%. On localization, we continue to drive localization in all of our major markets. And especially in U.S. we have crossed 62.6%, up from 60.3% in Q2 last year. Our relationships with various universities, our brand presence in the U.S. market has helped us satisfy our demand through the cadre building and recruitment that we have been doing over the last three years as part of our localization initiatives. In Q3, we completed a new investment in Moogsoft and the follow on financing in Demisto as part of our innovation ecosystem. Moogsoft provide the platform to automate IT operations using Artificial Intelligence and Demisto as you might remember offers an automated incident response platform in our cyber security practice that combines security orchestration, incident management and interactive investigation. Both these companies are leaders in their respective segments, and enables us to provide platform based services to our customers. The total number of investments to Wipro Ventures now stands at 18. We incubated three new themes through our Horizon program during the quarter, again in the area of intelligent networks, customer lifecycle management and service management. We continue to see strong traction on crowdsourcing on our top quarter platform. A leading multinational product and technology company has awarded a strategic crowd sourced testing services contract to Wipro on our Topcoder platform. The contract will leverage Topcoder's quality as a service offering and Wipro's expertise in quality assurance to help the client not only speed up test cycles but also strengthen the quality assurance process through a more diverse participation through crowdsourcing. What we are seeing on an ongoing business is, while we started on crowdsourcing in some specific areas, each one of our service lines is now being able to find intersections where we are able to leverage crowdsourcing to provide the faster turnaround times and more differentiated solutions to our customers. Our internal crowdsourcing platform Top Gear has now onboarded 29,600 plus employees on the platform, taking the total number of employees registered on the platform to over 90,000. This quarter 2, 186 project challenges were executed successfully, taking the total to about 5, 000 plus projects in this financial year. We continue to gain recognition with industry analysts and out of over 300 reports in which Wipro gets a mention, we are in the leaders' quadrant in 200 reports. To conclude, we remain quite focused on execution on both revenue and margins. As we built on our momentum on the back of strong customer relationships, deep investments in digital and other big bets and consistently improving on our operating metrics and innovating the next generation delivery model, while we remain watchful of the macro environment. Now, I'll request to you Jatin to talk about the financials.

[Jatin Dalal:]

Thank you, Abid. So ladies and gentlemen, as you know, we had guided for 1% to 3% constant currency sequential growth, we have come at 2.4% well within our guidance range. Our operating margins expanded roughly 1.2% and we delivered 19.8% OM for quarter three. If you see our ETR, ETR improved slightly from 22% in quarter two to 21.5% in quarter three. Our YoY growth of net income was very healthy at approximately 30% year-on-year. Our EPS expanded year-on-year at 38%. We improved our day sales outstanding by approximately six days on a sequential basis and seven days on year-on-year basis, resultant our operating cash flow was 142% of our net income. We have a gross cash of roughly $5.1 billion, which is $600 million higher than previous quarter end and net cash of $3.6 billion versus $2.9 billion as at end of quarter two. We realized on ForEx 71.66 Rupee for every dollar in quarter three compared to 70.36 in quarter two. We received a gain on ForEx of 60 basis points sequentially on account of ForEx. As we always maintain -- our payout ratio continues to be between 45% to 50% of our net income seen over a block of years. We always look at in April meeting, the overall payout ratio and currently the board in January meeting has suggested dividend of 1 Rupee per share. Subject to shareholder approval, we have also -- the board has also recommended a bonus share, one bonus share per every three share sale. Our outlook for quarter four is a 0% to 2% sequential growth in the constant currency of quarter three, which is mentioned in our press release. We will be very happy to take your questions from here on.

[Operator:]

Thank you very much. We will now begin the question-and-answer session [Operator Instructions]. The first question is from the line of Sandeep Agarwal from Edelweiss. Please go ahead.

[Sandeep Agarwal:]

First of all, I just wanted to know now, you spoken that digital is now 33% of our business and it is growing at 35%. So almost we are talking 10% year-over-year growth from digital alone for the overall company. I would like to know how much deterioration in the balance of the business has already happened, or what I would like to understand is, will the balance of the business continue to decline or remain stable, which will lead to digital becoming 50%, 60% of the overall business going forward? Or do you think that large part of pain in the non-digital side has already been behind and going forward, it will at least be stable to some low single digit growth that is question number one? Question number two on digital again, generally we have seen in last 20, 25 years of history that a particular business line or segment, when it becomes 30%, 35% then we start getting lot of margin benefit. And also the growth number start coming down a little bit. I understand that digital is not a segment or a vertical and then it is across. So obviously, if maybe our whole business become digital in next five years that is a possibility. So what is your sense? Are we close to that number where probably this 35%, 40% growth rates will cool off and the margins will also start improving significantly?

[Abidali Neemuchwala:]

I think as you rightly pointed out, we've been quite proactive with all of our top 100 customers to take propositions, which in some sense provide digital transformation IT modernization alternatives to the legacy work that we may be doing with them that as you see results in significant growth in the existing strategic customers for us but at the same time as you rightly pointed out, it does result into cannibalization of the of the legacy business. At the same time, a lot of the run part of the business that we currently have has productive but with the benefits, that historically in our industry used to be 3% to 5% are seeing a higher amount of productivity being delivered through platforms like HOLMES leveraging artificial intelligence and machine learning technologies. So I think your observation is right. Personally, my view is that in the next five years, almost all the work that we do would become part of what we define as digital today. So there is no new non-digital work that is coming. We are transforming the existing non-digital or legacy work into digital based on the appetite of change at the customers based on how some of the assets are written in their books, especially in the IT infrastructure space. For example, migrating to cloud rather than reinvesting in technology refresh cycle and so and so forth. So we are quite proactive with our customers in being able to do that. We do see while from a margin profile perspective and pricing, we do see a slight premium in our digital business, or the new business that we are doing. But at the same right now, a lot of these margins get reinvested back into the business, because we are still in the investment mode. Because as you rightly said, digital is not standalone business but it is a combination of various technologies and ways of working and some of these, while are getting matured like the migration to the cloud or some of the customer experience and design areas, there are still lot of investment area across artificial intelligence, machine learning, big data, et cetera. So it's a portfolio which still it continues require investments in spite of we being able to command a slight pricing premium, as well as higher margins in this part of the business.

[Sandeep Shah:]

So I think one question Abid you probably missed, which I wanted to know. So do you think that as you said next four-five years everything will be digital. So then does that mean also that this 35%, 40% rates are not sustainable, because some portion as you mentioned cloud migration and the things that would to be in the matured phase, while others like Artificial Intelligence, automation IoT maybe at initial stage. So what is -- if you can clarify little bit on that?

[Abidali Neemuchwala:]

Yes, of course as the volume grows, the pace will slowdown. But right now, also remember the market size is increasing, because technology is becoming part of every industry unlike 20-25 years back when technology was only used for back office processing. Now technology is becoming the product. So some of the areas, especially in our engineering services business, our mobile and digital experience piece of the digital business is finding new stakeholders new areas of application in traditional industries, which creates a much bigger market size. So while you are right that the growth rates as the pie increases, because of the base effect the growth rates will slowdown but there is more market also that is getting created. And I think we will get a fair share of our supply in the market.

[Operator:]

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

[Nitin Padmanabhan:]

The first one is, if we look at the way our hedges are and we take it on the revenue line. Do you think going into next year just the hedges alone will be a good -- will provide a good tailwind for margin for the whole year? The second question is if you look at the fixed price project, which is closer to 60% now and in the context of rising onsite costs with the supply tightness there. Do you think that our ability to absorb that with the fixed price situation do you see that sort of impacting margins when we think from a slightly longer term perspective, considering that the supply-side may remain tight?

[Jatin Dalal:]

Yes, so Nitin, we will -- the ForEx has been very volatile, so I don’t want to speculate how it will flow next year, certainly. But I can talk about this year and this year we have seen benefit in ForEx, both from quarter one to quarter two and quarter two to quarter three. And they are indeed part of the operating margin that we have expanded. We internally of course work with a tight regiment of fixed outcome on ForEx that business can work with and build their cost structures around it. And we leave the volatility of the ForEx to be managed in good ends of our treasury. So overall, I will say it has played out well so far this year and we will continue to see how it plans out. On the second question on increased impact of the localization as a cost, I would put couple of points and I'll request Sourabh to talk about the cost of localization and our endeavors there. But very principally, fixed price project means that our delivery team owns the outcome and therefore, they have higher manual maneuverability around the type of automation they can put in, type of resources they can engage with. So to that extent in fact it is less of an impact on fixed priced projects. And on TNM side, you are able to price yourself as you go. So to that extent, you are also not impacted there too. But overall, localization as a theme is very important thing for our competitiveness in future. And I request Sourabh to talk about.

[Saurabh Govil:]

So Nitin on localization, it’s a journey which we started three years back. So it's not that we have started today, I think we saw it coming early. We have doubled our localization in the key markets over the last three years in a very planned fashion. We have first started hiring locally, then now we have made a good network from local collages, building teams, training people, creating development centers across and I will take a big market at North America and doing it. So it's not a sudden reaction to the rising demand there, because we anticipated it, planned it and we’re moving ahead. There is a crunch of steam talent in the U.S., but that’s true and we’re trying to -- we feel that we are much better positioned, given that we have done it in a much planned fashion.

[Nitin Padmanabhan:]

Just one last question if I may. I think almost the entire or bulk of the growth has entirely come from distill operations and platforms, which we early used to call. So in that context, do you see the rest of the practices pulling up going forward and how do you -- what is your thought here? And second is in the context of the ops growth and its pretty board based. Just your thoughts on how that worked your way?

[Bhanumurthy BM:]

Hi Nitin, this is Bhanu here I will take the question. Nitin, if you look at all the practices that we have, if you look at the year-on-year constant currency terms, you would see both digital operations and the platforms as well as our data analytics and AI activities doing extremely well. And there's two places where we have done good investments. And like you mentioned very well, earlier we used to call them BPO but now we do call them digital operations and platforms, because that’s the investments that we’re making to transform the existing customers; processes as well. So that’s the two practices you can see them going in double-digit. And the two other practices, both the modern application services as well as the industrial and engineering services, they are also going around 6% like Wipro itself overall. Again, these two practices we do believe that there is a great momentum in these practices; one, because of the kind of investments we have made; second, the marketplace itself in terms of the capabilities that are there for both application services in terms of modernization. The last what I want to talk to you about is on the cloud infrastructure services that practice is going extremely well for us. Again, the investments that we have made in making the cloud investments that we have made helping customers transform their applications infrastructure and data to cloud with the help of our cloud migration studios, that proposition is clicking extremely well. That service line you would see a little lower number, primarily because of certain geographical restructuring that we’re looking at. But overall, all the propositions are becoming very relevant for the market and it's also validated by the external analyst reports that we see where we’re being rated as leaders in about 200 of the reports that we have participated of the 300 that we work with.

[Operator:]

Thank you. The next question is from the line of Ravi Menon from Elara Capital. Please go ahead.

[Ravi Menon:]

You used to provide the cost of revenue, sales and marketing, MD&A for IT service and IT products separately. Can you just help us evaluate IT service margins. So could you give that please?

[Jatin Dalal:]

The investor relations team will circulate it and publish it shortly after the call.

[Ravi Menon:]

And secondly on the Q4 guidance, it seems slightly muted any headwinds that you anticipate, especially on the healthcare or something else that you have a call out?

[Abidali Neemuchwala:]

As I mentioned in my opening remarks, Ravi, the guidance that we gave is based on what we currently see. And while we don’t see any change in the demand environment at this point in time, but we do see at a macro level sudden -- both in our two largest markets U.S. and some of the results that we've seen right now and in the UK due to Brexit that we all know. And our guidance incorporates some of those uncertainties. Also, as we see a robust demand, we continue to see a very high level of pressure on talent and our ability to fulfill talent, and some of that risk is also built into our guidance. As we execute through the quarter, we've executed well in Q3 and we hope to execute well in Q4 as well. But the guidance incorporates some of the risks that we see at this point in time. The Wipro specific issues don’t change. As I have said, HPS will take a little more time. The guidance does incorporate some of that. Just to give you a sense, the open enrollment season is over for most markets, it will get over in January for all the markets. We’ve seen about 10% lower enrollment compared to our base last year. And if you remember last year in our Q4, which is the January, February and March quarter, a couple of customers decided to discontinue being in the market. So right now, we don't see any such indication. But the 10% lower enrollment, this is a price per remember kind of business so it will result into a lower revenue and that has been incorporated in our guidance as well. Otherwise, I have talked about the transformation of our India business, which will continue to be a little volatile next couple of quarters and that has been incorporated. And fundamental transformation for manufacturing business, which may take another couple of quarters, that has been incorporated as well. Otherwise, mostly we see demand in line with what we have been seeing in the past few quarters.

[Ravi Menon:]

And just one last question about the health you see in it. Though you said that open enrollments are actually seeing 10% lower enrollment and this quarter you have posted pretty good growth in the health business. So any large deal sales that have helped positive growth?

[Jatin Dalal:]

Ravi is your question -- it seems your voice was not very clear. Your question why the health has seen a growth in quarter three when the open enrollments actually fell as per Abid's commentary?

[Ravi Menon:]

That’s right, I have a very bad cold…

[Jatin Dalal:]

So Ravi that is because our open enrollment does have some onetime increase when we actually complete that annual activity in quarter three, and that has flown into the revenue stream for quarter three. But on a secular basis, there will be a decline that will be visible from quarter four onwards.

[Operator:]

The next question is from the line of Vibhor Singhal from Phillip Capital. Please go ahead.

[Vibhor Singhal:]

Just two from my side. One is Jatin, if you could just elaborate a bit on the lower G&A expense that we saw in this quarter. The absolute number has come down significantly from the last quarter and is probably the lowest in the last five, six quarters. So any specific one off there, or what could probably be the recurring run rate that we could expect in that number? And secondly, as you mentioned on the -- Abid if you can just probably elaborate on a bit on the energy utilities vertical. I mean, we've seen decent growth in that vertical in this quarter even for the last couple of quarters, I think you were -- while it was being negative. So what is the outlook right now on this sector, because for long this has been our weak link, and now with whatever prices that the crude is at being highly volatile. What is the outlook that you see for this segment?

[Jatin Dalal:]

So Vibhor, we did have a good recovery in some of our provisions for doubtful debt in quarter three. And if you see overall both -- all the counts of order to catch cycle, which is be it un-build revenue, probably it's historically lowest. Our DSO has been the best in many quarters and I would potentially say last few years. And also is reflected in a very good provision for doubtful debt recovery in quarter three. And that is reflected in terms of lower G&A expenses for quarter.

[Abidali Neemuchwala:]

Bala is on the call, and N. S. Bala who is our President for the Energy and Utilities business will give you a color on that business, which has been transformed quite well from our perspective.

[N.S. Bala:]

Your question on the volatility of the crude, we don’t see that to be impacting the energy sector as much. As a matter of fact, our energy segment has continued to see positive momentum. And that based on the continued spend that we are making on data and cloud transformation. But more importantly on your question on the past and what's happening now, if you recall the previous commentary we had talked about challenges we have had in our utilities segment. But in the past few quarters, it's actually brought about some stability to this segment. And in addition, we are focused on aligning our investments to the digital transformation that utility customers are undertaking, especially as they modernize their application landscape. So that would have started using the positive results. And we hope to continue to build on the momentum that we have been able to create.

[Vibhor Singhal:]

So Bala, if I could just probe a bit further on that. So basically, is the transformation solely driven by our initiative of aligning our investments to their requirements? Or are we also seeing an increased demand, or let's say momentum from their side in terms of deal flow size and which could probably give us a more visibility about the future quarters?

[N.S. Bala:]

There is a little bit of both in that. Vibhor, I would say that the customers are continuing to spend a little bit more aggressively in application modernization. But the bigger impacts have actually being the alignment of our investments to the modernization that customers are doing, as well as on the digital work that we’re doing in the data analytics space and I guess have low transformation. So that’s actually yielding the results like I said.

[Vibhor Singhal:]

So would it be safe to assume that barring any macro shocks or any unforeseen events, our revival in the segment should probably continue, maybe at a higher or lower pace than what it was this quarter, not to do with the number. But directionally, do you believe it should continue in the positive direction that transmitting over the last few quarters?

[N.S. Bala:]

We believe that we have kind of stabilized the major issues that are impacting us in the past. So I would say that there is reasonable degree of positivity about the next few quarters. I won't comment on how much that could. But in general directionally like you said we seem to be headed in the right direction.

[Vibhor Singhal:]

Jatin, just last thing on the G&A expense that you mentioned. You mentioned that as you mentioned the reason that this quarter we saw a good recovery in provisions. So considering this as an exceptional, I mean this kind of recovery in this quarter. Do you believe the G&A expense to probably revert to the earlier quarterly run rates that we had before, not necessarily that just the last quarter, but let's say if I want to take the average of last six or seven quarters that could generally be the forward looking G&A expense?

[Jatin Dalal:]

That is right, Vibhor. You look at right way that you explain is we should look at a trend over few quarters, because there have been ups and downs if you see the G&A trend over last six quarters.

[Operator:]

[Operator Instructions] The next question is from the line of Viju George from JPMorgan. Please go ahead.

[Viju George:]

I had a question on the analyst mentions that you cited. You said that you are regarded as a leader in 200 of the 300 reports. If you look at some of the common areas where you have leadership, because this I think also looks at some of your peers as well. What to be those areas where you think you've got leadership with respect to peers as identified by these analyst reports?

[Abidali Neemuchwala:]

So typically, when you look at these reports said as you rightly said, two or three of our peers would also be participating there but in some reports, especially in the new age areas of digital AI, some of the stuff that we talked about, business transformation, in the areas of data and analytics, I think we’re creating a differentiated capability and that gets reflects in these reports.

[Viju George:]

And these are, what do I say, these are all technologies and capabilities as it has been integrated into larger projects as we speak as well, I presume?

[Abidali Neemuchwala:]

That is correct.

[Viju George:]

On margin improvement, I think its G&A driven. What would be a target or a comfort margin operating range, because at some level we could say that you might still have some room to move up given that we have margins are. But other hand, I would say that the peer margins might have to move down. So from reports prospective for the growth is wants to achieve. Is there a target not a guidance, but kind of a target margin range where you feel comfortable?

[Jatin Dalal:]

So Viju, let me first start with the point that there are newer set of opportunities and those are defined as big bets of Wipro where we want to remain invested in, and go in fact disproportionately after investments. So there is clearly an ambition to do that. And as we do that, we will continue to look at automation, G&A, other expenses where we can get better productivity out of our existing cost base with a view to deliver a certain margin profile as we generate and increase the growth from this new big bets. We have delivered a trajectory in quarter two. We have delivered a further uptick in that trajectory in quarter three. We remain comfortable in this bank, and where there will always be quarterly variation. For example in the current quarter, we have given salary increases to some of our people, which will impact our margins in quarter four. And we will continue to, as I said, remain invested and make incremental investments even in quarter four on our big bets. So that would be an additional step. So overall, Viju, the answer is that yes we feel comfortable in the trajectory, which we have demonstrated in quarter two, quarter three. But goal will be to create -- to do investment, create differentiation and create growth.

[Viju George:]

And Abid two specific questions, if I may. Obviously, the growth if it takes over slightly downward timeframe in the last four to six quarters has been driven substantially by BFSI. But now some of the other verticals are also beginning to participate as well. Do you think that this is very sustainable here on where you can have broad based growth from many more verticals beyond BFSI and therefore, make it much easier for Wipro to close the revenue gap where it is to largest peers if you have ongoing participation? Do you think we are beginning to tick those boxes as we speak?

[Abidali Neemuchwala:]

That is right, Viju. You rightly observed. If you look at the constant currency Q-on-Q growth across our verticals expect technology, which also as you know is because of the furlough impact is maximum in the technology vertical. I am very pleased with a very secular growth across various verticals that we have seen. A couple of them may have a couple of more volatile quarters like manufacturing or health. But at least three of six business units have delivered double-digit year-on-year growth for us. So that does feel quite comfortable to me.

[Viju George:]

And do you feel that this is the start-up something that can endure?

[Abidali Neemuchwala:]

I'm sorry can you repeat?

[Viju George:]

No, no, you feel that this can sustain going forward that we won't -- I mean because…

[Abidali Neemuchwala:]

All of the ones that I'm talking about are sustainable, because as I said a couple of them which will take a little longer time, I pointed out the volatility. So the ones that I did not point out the volatility, I feel quite comfortable that it is sustainable we've got good customer acquisitions, we've got a good deal flow, we've got a good demand pipeline and we've got capabilities and offerings that we have invested in and we have customized for those domains where we see good customer attraction.

[Viju George:]

And lastly, and sorry for taking too much time. Abid, all of your incremental growth comes in digital and typically, there is a view that distill is important for our clients competitive advantage. So do you think that when you look at the nature of development work that's coming for you and maybe for the industry. It becomes since its strategic since it's competitive advantage driven, it becomes less susceptible to macro shifts or you think if clients want to cut back, they will cut back where you could tell us whether digital or not. Are we more resilient today than seven, eight years back look at the nature of development and spending that’s coming out?

[Abidali Neemuchwala:]

So the answer is yes, because a lot of the investment is happening in revenue generating space for customers. So while the spend is discretionary and if there is macroeconomic uncertainty discretionary spend does commander pressure but compared to a back office transformation project, which typically the IT services industry has seen in the past where discretionary spend would have got cut down as one of the first items to save cost. Now, a lot of the investment is in revenue generating activities. And I would believe that the impact would not be as high. Again, we have not seen a cycle of slowdown post the digital transformation era, so this is still something which needs to be tested out. But I would agree with you on the basic hypothesis.

[Operator:]

[Operator Instructions] The next question is from the line of Sumeet Jain from Goldman Sachs. Please go ahead.

[Sumeet Jain:]

So firstly, I wanted to understand on your margin front. I mean, we are seeing a pretty good sharp improvement and you highlighted G&A as one of the reason but if I probe about the other margin levers. Can you comment a bit on your onsite effort and the utilization? How much more room do you have? Because particularly on the onsite effort, you guys are at 22%, which is one of the lowest compared to your peers and given that more, the new digital projects have more onsite centric nature. Can you believe that you can still further increase the off-shoring out there?

[Abidali Neemuchwala:]

So Sumeet, I'll let Jatin answer the specifics with the numbers on this one but I want to just pain a more high level strategic picture on how we are driving margin improvement, because some of the traditional levers that we have seen in our industry are fundamentally changing. So the operational lever that you talked whether there's utilization off-shoring and so on, we will continue. And in some sense in a stable pricing environment stable ForEx environment, it becomes almost like running on the treadmill, because also annually while we continue to do that, there is annual salary and wage inflation that needs to be taken into account. But the way we are looking at this is driving a long-term sustainable margin improvement, which is through hyper automation and crowdsourcing and pricing of premium services that we talked about, which internally we call as the next generation delivery model. And that is why in my updates I always talk about the percentage of work done by bots, which as I mentioned, has gone up by almost 3% this quarter from Q2 to Q3 based on our Wipro HOLMES platform. And as we increase the fixed price percentage, our work, our ability to retain the value that gets created from this automation is with us. Similarly, on development side of the house, the internal crowdsourcing that we do which is update on the Top Gear team is what deliver savings. And a lot of the improvement that you have seen margin comes from those operational levers. So those are the futuristic operations levers and I wouldn’t limit our conversation only to utilization and off-shoring and those levers, which we continue to work on nonetheless. I will let Jatin give up a more specific split of the numbers.

[Jatin Dalal:]

So Sumeet, thanks for question and in terms of I think Viju also mentioned it and I want to clarify that. It is optically looking like that there are lower G&A expenses. But there are two opposite impacts there, our cost of delivery has certainly improved due to the factors just that Abid spoke about. Automation better execution of fixed price projects, crowdsourcing and so on and so forth. We do have a slightly higher expense line on depreciation and amortization in quarter three, which is impacting that overall line. And we have an offset of that in some form in form of superior execution on PDD. So overall improvement is seemingly like optically from the G&A line, but the way we look at it as a management is really superior execution of delivery that we have done.

[Sumeet Jain:]

My second is around, I mean, you guys have seen a very high -- achieving a very high localization in U.S almost to 63% levels now. So can you just comment what utilization and attrition levels are you seeing in U.S. for yourself? Are they higher or lower than your company average typically?

[Jatin Dalal:]

So Sumeet as I said, our localization journey has been for last three years, we’re seeing high demand across -- a lot of our peer groups are also hiring there. So attrition is lower than the company average. Utilizations are high because we are conscious about the bench and costs sitting in the U.S. But there's something which needs to be looked at very carefully, because we are seeing a situation where this attrition can go up there given the crunch of the stem talent in the country.

[Sumeet Jain:]

And maybe lastly on your capital allocation policy, I mean any thoughts around the share buyback will we see in this financial year. And let’s say in case it gets pushed out to the next financial year. How are you planning to maintain your capital allocation policy of around 45% to 50% of net income being paid out?

[Jatin Dalal:]

So Sumeet we have shared this before. We are dependent on completion of our merger of our subsidiaries. And it is taking procedurally longer time than what we initially envisaged. So we will play it by the year. As I have mentioned that we have always -- as we have mentioned, we have always looked at payout policy over a block of years. So as and when one is deciding the next dividend payout or next payout decision, one would be able to calibrate in what point in time we are and therefore what should be the right decision around it.

[Operator:]

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

[Sandeep Shah:]

Just Abid, question is in terms of the guidance. So if I look at last year fourth quarter, we still had a slightly higher portfolio related issues and the contributions from those, including India was higher, which might have declined over four quarters. At that time, we have even guided 1%, to 3% growth rates. This time with more confidence on the demand, as well as the deal closures which are happening, we are guiding for 0% to 2%. So you are saying you are factoring macro issues but in your initial remarks, you also said there is immediate impact of the macro. So can you give us some color why this is -- if you can clear some confusion on this?

[Jatin Dalal:]

So Sandeep as I've said, we look at what we see at the time that we guide and then we incorporate the risks that we see are elaborately explained the risks that we see. One is specific to us around our healthcare business and specifically HPS and the lower enrollment. The two others are around both macroeconomic situation, which we are very watchful of, primarily both our large markets in the U.S. as well as in UK. And as we keep seeing renewalship -- as you know, this is end of the year timeframe where a lot of our contracts gets renewed, which are annual contracts or quarterly contracts and as we see the pace of those renewals. Our confidence continues to go up. Right now, we have guided based on the current state that we see. As I said, our order booking has been really robust toward the last two quarters and some of that gets reflected in the guidance as we ramp-up those deals in the January, February and March quarter and Q1 of next financial year.

[Sandeep Shah:]

Just Jatin question on the margins, so based on the replies which you have given, you mean to say that 19.8% is a maintainable margin with a narrow band. Is it the way we should look for?

[Jatin Dalal:]

I think you should look at the improvement that we have done in quarter two and quarter three. I think there will be quarterly volatilities in every quarter, including some of the investments that we continue to make as I mentioned. And I think, our endeavor would be to remain in this trajectory.

[Sandeep Shah:]

So you mean to say 18.6% to 19.8% is the trajectory which you are looking, which is Q2 and Q3 margins?

[Jatin Dalal:]

Yes, but you must -- that is right. But there is ForEx included there et cetera. So I am therefore not quantifying a number or a band which can be deemed as guidance. I am saying this is the operational flexibility operational execution that we are comfortable around. There will be puts and takes there will be ForEx volatility, but this trajectory is what we are comfortable.

[Sandeep Shah:]

Just one clarification, if I look at the line item lifetime expected credit loss and the provision for deferred contract costs. On a Q-on-Q, there is almost like a positive swing of 170 crores, which is a 112 basis point to consolidated revenue. At the same time, you also mentioned depreciation has some impairment which is 835, which is 84 crores. So roughly puts and takes if you look at the positive impact is still higher by close to around 70 to 80 crores. So how should we look at it -- so it will reverse going forward?

[Jatin Dalal:]

Yes, so as I responded to one of the questions, I think you should look at as a trend over few quarters and see it as a normalized spend. There are two or three impacts that have flown into that line this quarter and therefore you are seeing a number, which is lower than what we have demonstrated in past to buy our margin.

[Sandeep Shah:]

So for the negative number, is it largely the earlier bad debts being recovered or there is something else also in terms of that lifetime?

[Jatin Dalal:]

No, this is -- when we execute projects and they are dependent on certain outcome that we are able to demonstrate, or sometime it's just the delay on customer side to process payment, especially if it is linked with any bureaucratic organization. So we have provide based on our policy of time based, which we provided and then when we did recovery, it came as a positive.

[Operator:]

The next question is from the line of Surendra Goyal from Citigroup. Please go ahead.

[Surendra Goyal:]

Abid, are you being able to retain the gains that you achieved due to such sharp increase in automation levels? Or is this in line with what was already promised to the customer? And follow up on that same question, Jatin, so this kind of benefits which come because of any margin improvement should be visible at the gross margin level. Is that understanding right?

[Jatin Dalal:]

So Surendra right now both the automation gains and the ForEx gains if you see, we have been able to retain and pass it through reflecting in our operating margins. Overtime, as you know very well, I mean deals come up for renewal but productivity milestones hit some of these things need to be shared with the customers, which is the normal rhythm of our business.

[Abidali Neemuchwala:]

And Surendra, yes, this gain will come in cost of good design and that has what has come this quarter also. It's just that we have an additional cost in that line and a slightly lower cost in G&A, the net impact is being visible optically in G&A for quarter three. But operationally all those gains flow through our cost of goods line.

[Surendra Goyal:]

Could you just clarify what is the additional cost in cost of goods line?

[Abidali Neemuchwala:]

Yes, so this is -- in some form, the amortization line which is -- and couple of other expenses, which is higher and G&A where we had a large PDD reversal, is sitting as a gain. And therefore, you are seeing it at the gain. So you are not seeing the benefit of operational improvement in the cost of goods sold line.

[Operator:]

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

[Aparna Iyer:]

Thank you all for joining the call. In case we could not take your questions due to time constraints, please feel free to reach out to the Investor Relations team. Have a nice day.

[Operator:]

Thank you. On behalf of Wipro Limited that concludes this conference. Thank you for joining us and you may now disconnect your lines.