While India’s third-largest IT company Wipro ’s revenues met analysts’ expectations, brows have been raised over its Q1FY15 guidance . The company has guided for a muted Q1FY15, but still is a growth from earlier guidances, says Suresh C Senapaty, executive director and chief financial officer. While Q1 and Q4 are traditionally weaker quarters, the company gave a guidance of less than 5 percent growth in Q1FY14 and that has risen significantly to 8 percent in Q1FY15. “Theoretically, quarter-on-quarter (QoQ) looks weaker but on year-on-year (YoY) basis it is looking strong,” explains Senapaty. While the current quarter is likely to be plagued by the major headwinds of contraction in retail and India business, the net quarter (Q2) is looking to be positive, adds chief executive officer TK Kurien Below is the edited transcript of the boardroom. Q: The first question I have is on guidance. While Q4 was a good quarter we will talk a bit about the Q1 guidance. For growth to come down from 2.5 percent in Q4 FY14 to possibly no growth in Q1 FY15 , what are you factoring in terms of India business as well as retail because you have highlighted both of them as the pressure points for a weak guidance in Q1? Are you factoring in a possible contraction in India as well as in retail into this guidance? Kurien: If you look at our business and I want to just give you a sense to what Q1 guidance is all about in the backdrop of what we have achieved in Q4. If you look at Q4, Q4 was very good quarter for us in terms of order book. We see the same momentum continue in terms of order book in Q1 and Q2. However, there have been two headwinds that we have had. One is the retail business where we have seen a secular decline and we see that decline continuing in Q1 also. Similarly, in the India business, traditionally we have had a lumpy India business. Q4 thanks to budgets, have always been very good and in Q1 it takes time for us to renew budgets, which happens through the quarter. However, when we give guidance we don’t anticipate stuff that is going to happen. We basically take all the orders that have been closed, look at execution and then give our guidance. To that extent India has been muted in terms of guidance. It is actually a decline and we expect that as we go through the quarter we would be in a position to kind of catch up. So, that broadly would be factored in into the negative side of the guidance. On the upside what we have factored in is a fact that we will be able to execute all the orders that we have won. I think that is the range we have given. Fundamentally, what has happened is that we try to stay within the range as in the past and that will be exactly what we are going to try this quarter too. Q: I get qualitatively that you are saying it is going to be a muted performance but quantitatively is it going to be a contraction in Q1 in these two? I still do not get that? Kurien: I think in retail there is a going to be a contraction. In India business too there is going to be a contraction. The answer is yes, but we expect that as we go through the quarter the contraction that we are going to be seeing in retail in Q1 would be made up in Q2 and to that extent we clearly see the quarter two looking better than Q1. Senapaty: One will see that Wipro generally is much stronger in Q2 than Q3 traditionally and Q4 and Q1 tend to be weaker with Q1 being the weakest. The first quarter, while in some form on its QoQ basis looks little weaker, if you look at last year Q1, we gave a growth of less than 5 percent and this year based on the guidance of this Q1 that we are talking about, it is at 8 percent plus. Therefore, as one can see, on a quarter-on-quarter basis we are increasing the guidance on year on year basis and as we move forward, our India business would be taking this 8 percent up as we go forward. We talked about good order wins, we talked about good pipeline. We did some closures towards the end of Q4 and the benefit into Q1 will be lower but as we get into Q2, it will be far better and therefore some of will be reflected in Q2. Therefore, theoretically QoQ looks weaker but on year on year basis it is looking strong. Q: Coming back to the other point that you said that growth will come back in Q2, but growth could also come back because the Q1 base is going to be less. My question is will growth in Q2 be compared to the industry standards or industry growth rates in Q2. Is that what you expect? Kurien: I wish I could understand what my peers are going to do in Q2, but all I can tell is that if one looks at our Q2 numbers, they are going to be stronger than Q1 and do not anticipate that our growth in Q1 is going to be negative. That is what we have guided – negative to positive. So, do not assume that it is going to be negative in Q1, it is a range that we have guided, we normally stay within the range and all we are saying is that Q2 would clearly be better than Q1. Senapaty: If you would have looked at our growth of Q4 and Q3, for both those quarters we have been at the top-end in terms of sequential growth compared to the industry. Q: Let us focus on your margins then. At 24.5 percent it is a fabulous increase that you have been affecting in your margins for the last few quarters; it is now standing at a 15 month high. Has Wipro scalped out the best of the productivity as well as operating efficiencies with respect to your margins? Kurien: If one looks at our margin number, fundamentally our objective has been to drive productivity as much as we can in our typical business and more importantly create a change business that can get us better value. So, those are the two kind of levers that we have been working on over the past couple of years. Both have played themselves out during the quarter. Going forward, especially in Q1, we have announced a salary increase and to that extent we see that there is going to be a little bit of headwind because of the salary increase that we are going to give. However, at the end of the day you have to be fair with people and you have to get the best people and to that extent it is a necessity that we have to live with. So, from our perspective, given these two factors, overall we are fairly confident that we will be able to maintain our margin. There are a couple of areas that we will continue to invest in. We will continue to invest in customer experience, we will continue to invest in automation and overall, our objective would be to make sure that at a gross margin level we keep improving and keep reinvesting in customers and employees; I think that is the focus. Q: You said that you will continue to maintain your margins and that will be the objective. So, can we assume at least for the medium-term Wipro’s operating margins will be in this band of 24-25 percent, is that the target that the company has setout? Kurien: In Q1 we will have headwinds because of compensation. So, that is something we need to factor in. However, in the long-term we will keep our profitability in a narrow band. Senapaty: Just to remind, we have expanded margin 150 basis points quarter-on-quarter (QoQ). If one looks at full year of 2013-2014 versus 2012-2013, we have increased the operating margin by about 195 basis points; Q4 versus Q4, about 420 basis points plus. On a year-on-year (YoY) basis, the endevaour would be holding to improving margins but on a QoQ like compensation increase, that happens in a lumpy form that one cannot sustain that on a QoQ basis. However, on a YoY basis the endeavour would be to hold to improve as you go forward. Q: Let me talk about the application development maintenance (ADM) business because that as a percentage of your revenues has been declining on a sequential basis at least since Q1 of FY13 and it is a significant portion; it contributes close to about 20 percent to your revenue. Will it continue to drag, the ADM business and are you facing any kind of pricing pressure there? Kurien: We need to change our data sheet to some extent on a forward basis. If you look at the way we define ADM business, ADM business is typically a legacy business that we have in Wipro. Legacy business by its very nature has to decline and that decline has to be taken up by the other components that we have in those lines. So, overall the decline in ADM business is a reality. It will continue to decline but we are pretty confident that whatever decline we have in the ADM business will be offset by the other businesses that we have. Q: Your net headcount has declined for another quarter while you have given wage hikes; it actually lags what one of your peers Tata Consultancy Services (TCS) has reported by way of what they are planning to give in terms of wage hikes – your comments? Govil: There are two parts to it; we spoke about the headcount and the salary increase. The salary increase, every year we give it in June and we are committed to doing that. We will be differentiating, so what I have given in the 6-8 percent as an average. Let’s not look at averages but the right people, there will be huge differentiation and people be getting good increases. This could be much more for an individual than what number has been shared.There is no change in our hiring plans from last year; we will continue to go on hire on campuses the way we are hiring and we will continue to hire this year based on business demand. One will see more hiring happening on onsite, so that’s the other piece which we will see and lastly, there is a scope from utilisation standpoint to improve our utilization. We have seen an uptick happening, the right execution happening, there is headspace for us to improve and that will also drive the overall headcount. So, these things we have to keep in mind given the salary increases, all that an attrition. These three will decide in how we move forward on overall headcount point of view.
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