Outlook stable; see better pricing, realisations: Wipro

The company has registered forex losses of about 0.1% of revenues. Its Q1 onsite billing is up 3.9% sequentially. The Q1 offshore billing rate is up 3% sequentially while the Q1 volume is up 2.2% sequentially. Wipro’s Q1 pricing has remained stable.

The company’s outlook remains stable, the Wipro management said. It sees improvement in pricing and realisations.

Excerpts from CNBC-TV18's exclusive interview with Suresh Senapathy, Girish Paranjpe and Suresh Vaswani:

Q: Would you please explain the variation between the Indian GAAP and the US GAAP numbers and the mark-to-market (MTM) that you have spoken of more than Rs 900 crore?

Senapathy: It has been a very good and satisfying quarter as far as Wipro’s Q1 results are concerned. About 3.6% sequential growth in dollar terms, in terms of total IT services and also from a perspective of the traditional global IT services that we have reported before. We have been able to have Rs 908 crore of net income which was about 25% YoY growth. Also we had held margin in terms of Q4 versus Q1 on the traditional global IT services. In fact there was an expansion of 10 bps.

Thirty customers were added and good growth was seen from the financial services, retail and various practices. As far as certain MTM things are concerned, typically India GAAP, we had got an external commercial borrowing of about USD 350 million, which is related to the investment made in Infocrossing, the acquisition last year. Because it was a borrowing in specific to that particular investment when an exchange difference happens, on the investment account there is a gain or a loss and similarly on the loan there is a gain or a loss.

While on the Indian GAAP, by application of AS30, we have been able to apply hedge accounting and therefore it goes into the capital account. The US GAAP because of the currency difference which is a borrowing in yen along with the SWAP to the dollar investment that we have done, it is not technically allowed to be treated as hedge accounting and therefore it has been marked-to-market. But from an economic perspective, if you were to correct for that, the non-GAAP number would almost be comparable to that of the Indian GAAP numbers.

So there are two aspects, one is the external commercial borrowing, MTM in the US GAAP of about Rs 66 crore and there is Fringe Benefit Tax (FBT) on ESOPs because we recover the FBT from the employees as and when the ESOPs are getting exercised. But under the US GAAP, it goes into the capital accounts and while the pay out of the FBT is treated on the revenue account and a combination of that on an economic principle, there is no change so if you do adjustment for this about 98% of our Indian income is in US GAAP.

Q: Just reading your Chairman’s comment on the environment in the US being quite painful and therefore, a fairly cautious stance there at Wipro. Your peers TCS and Infosys have had fairly significant client specific issues in the current quarter to report. At Wipro are you facing any kind of individual client issues which could be slowing growth?

Paranjpe: No; I think it’s a broad concern that we have because of the turmoil in the US financial services markets although our own business and financial services has been quite resilient; we have had sequential 5.5% growth and outlook still is stable, but you never know what’s going to come in the next few months ahead. Broadly speaking we are still optimistic that second half will turnout to be better than the first half.

Q: To get back on margin performance - can you outline exactly what the EBITDA margin performance and the global IT services margin performance has been this quarter?

Senapathy: IT services - if you look at it on a traditional basis, there has been a 10 bps improvement and on combined IT services, it’s about same despite the fact that we have Restricted Stock Units, which were granted in Q1 and so far as foreign exchange impact is concerned, it is 10 bps favourable in Q1 versus Q4. But net-net in terms of pricing, we have got improvement; on the utiliaation we have got improvement. So various operating parameters we are able to counter all the headwinds in the form of Restricted Stock Units that we had and therefore it was very flattish.

Q: What kind of environment have you seen for pricing and what kind of increases have you been able to bring through this quarter both onsite and offshore?

Vaswani: I think broadly the pricing environment has been stable and we have had better price realisation this quarter and that’s largely been due to some of the rate increases that we negotiated in the previous quarters and more focus in terms of productivity and fixed price projects. But broadly we see a stable pricing environment and we are still able to get stronger price points from new contracts and new customers.

Q: How are you approaching this foreign exchange thing right now? Have you changed your hedging policy in any significant manner? Do you think some of these marked-to-markets could actually translate into potential book losses coming out on the forex front in the rest of the year?

Senapathy: It’s little notional when you say forex loss, because when we do a designated cash flow hedging, you have sold the dollar based on what you have contracted with the customer. But generally when you do a marked-to-market, which means from Rs 40 it has become Rs 43 and therefore it is translates into a loss, it’s a very notional loss; in other words you have already realised Rs 40-41 depending upon when you did the actual hedging.

So from that perspective, we have about USD 2.6 billion of hedges over and above what has been applied to the balance sheet and that will have from other comprehensive income perspective, about Rs 900 crore which will be spread over the next three years. This will hold as it is if the current premium rates and current exchange rate remains but if they soften or worsen, which means rupee depreciates, it can go up and down.

But net-net, if rupee depreciates on medium to longer-term, we will definitely benefit on a shorter-term because we have these hedges primarily for getting a higher level of certainty, we will not be able to get the upside, but it means that whenever we did a deal we have been able to forward sell and therefore it is a notional marked-to-market loss.

Q: Are you seeing any kind of  slowdown of ramp-ups happening in any vertical at all, telecom, BFSI, retail because your Q2 guidance is not exactly gung-ho, it's about couple of percentage points higher than what you achieved in the current quarter?

Paranjpe: It’s a muted guidance and clearly the market is not piping hot, so there are clients who are cautious and not adding too much new business. But if one looks at deals that we closed last quarter; deals on a total contract value basis, which are over multiple years, we have almost half billion dollar plus value of deals closed. So the market is not dead, there are deals getting done, maybe there some extended cycles and it may take a little longer than we normally expect, but at this point at least we think there is reason for caution, but not despair.

Q: Could you break up those large order deals in terms of how many are USD 100 million plus and which vertical it is that you are seeing the greatest traction in for big deals?

Vaswani: Broadly, we have had three very large outsourcing wins and we have a string of multi-million dollar, multi-year contracts and these have been fairly widespread, but the sectors that have done relatively better than the Wipro average have been surprisingly the financial sector and the retail sector.

We have seen good ramp-ups in terms of some of our financial sector accounts were concerned and we have seen some strong wins in the retail sector.

Q: By Q2 you will have a wage hike to contend with; what is it that you are factoring in right now because there is a lot of talk of wage inflation and how much erosion do you think you will have to see on your margins because of that?

Senapathy: We will review the compensation for offshore in Q2 as we did last year. We haven’t still quantified thr amount because it will be during the course of the year. It will have an adverse impact, but we would like to hold or expand margins as we did last year.

So quarter to quarter there could be some variation. In Q1 we have been able to hold the margins, so we cannot be very specific with quarter to quarter, but over a year point of view it looks that we should be able to hold or expand margins.

Q: Could you update us on what happened with Wipro BPO in this current quarter and what does it look like going into Q2?

Paranjpe: There is a fairly strong demand coming in on the transaction processing side, whether finance and accounting, HR, back office work, all are going strong. On the voice side, it is up and down and sometimes it has to do with level of volume that our clients see coming up in their own segments. It also has to do with some ideas that they have about where voice process are best run, but on the transaction processing side I think demand continues to be very robust.

Even better than that, if one looks at the deal pipeline, the size of deals and the complexity of work that is being talked about, that is specially promising.