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Wipro Limited (NYSE:WIT)

Credit Suisse Group Technology Conference Call

November 30, 2011 13:00 ET

Executives

Sridhar Ramasubbu – Chief Financial Officer

Analysts

George Mihalos – Credit Suisse

George Mihalos – Credit Suisse

Okay. So, I think we are ready to begin. My name is George Mihalos. I am part of the newly hired IT services processing team here at Credit Suisse. And our next presenting company is Wipro being represented by the CFO of International Operations, Mr. Sridhar Ramasubbu who is a long-time Wipro executive. Sridhar, thank you for being here first and foremost. And I think we'll begin with Sridhar giving sort of a quick (Fibernet) update as to Wipro's business and then we'll jump right into the Q&A. So, Sridhar, I will turn it over to you.

Sridhar Ramasubbu – Chief Financial Officer

Thanks. I want to look at the three or four issues, which are on top of peoples' minds. In terms of first, the Q2 performance, it came at the top end of the guidance. We guided about 2% to 4% and we came at 4.6% sequential growth, which has been positive. For Wipro, specifically we had a challenge. We had CEO change in January of this year and the reorganization efforts we communicated to the market that it will take two to three quarters before we sort of get it to a rhythm of continuous growth. So, we have the leadership change, the key leadership changes are in place, the go-to-market single-access is in place. And we have done – we believe that we have done what we need to do and we sort of fixed the supply chain issues which we had and we are looking forward to the coming quarters in terms of how we can realize those benefits of those changes, which here are affected in the reorganization. So, the reorganization has been done is behind us.

We had recently acquired oil and gas unit for both upstream and downstream revenues in oil and gas, huge potential from SAIC for about $155 million. That integration has gone well and they are looking at that acquired unit in terms of delivering results as you move forward, and also in terms of geo-expansion into some parts of Canada, Calgary, in LATAM, in Africa, and Middle East. So, it looks very promising, very good consultants we have. I think we will leverage that unit in terms of taking our Energy and Utilities Group, a vertical to the next level.

In terms of demand outlook, in terms of how the market is sticking at, we still think that there is no appreciable change of any slowdown or any change in customer behavior at this point in time. We are getting about 53% of our revenues from US, 28% from Europe, and about 10% each from India and Asia-Pacific, and that's from the rest of the world, including Japan. We are not seeing any difference in customer behavior neither delay in signing up contracts or any cancellations, etcetera, etcetera.

We did communicate in July that we had one customer who delayed the signing of contract by about four weeks in Europe and that was one incidence. And then in the October earnings call, our BFSI had communicated that, I mean to responding to your question that how do you see the budgets going forward the next year said there is no appreciable change. However, there could be couple of investment banking customers in the security space in the U.S. and couple of them in Europe could moderate a little bit in their projection for next year, but it's too early to comment, because none of them have finalized their budgets. The budgets have not been finalized across the verticals and we are looking at – we are positive, we are not seeing any pricing pressure, we are not looking at any ramp downs, we are not looking at lengthening up sales cycle. So, we are not seeing anything untoward in the market, which is supposed to reflect the macro level market challenges what we are hearing, barring today I heard that market has gone up because of (action) from federal government.

On the verticals in terms of momentum verticals, we see good pipeline and good order book and good traction in energy utilities, in retail. The retail was little bit softer last quarter, but overall the pipeline and the opportunities are plenty there. We see huge opportunities in healthcare and we see huge opportunities in BFSI.

On the service line, both Infrastructure Services; BAS, the Business Application Services and BPO are showing promises. BPO has little bit declined last quarter, but the pipeline is good, the opportunities are good. We think that we will get very good traction in those areas as well.

On the geographies, U.S. and Europe are continuing their good stand. We are still keeping our fingers crossed in terms of the macro level issues in Europe. But even during recession, we grew very well in Europe. Last quarter, we did 5.3% sequential in Europe. So, we are confident that the value prop of this offshore will help us keep us in good stand in Europe as well. But still we are keeping our fingers crossed, because we do not know the linkages of those European market, financial market, and the economy what it will do to U.S. and what will be the effect of fact. We don't know about that.

So, overall, we think the – while we are watching the market and the market comes from the consumer behavior, we have not seen a coupon rate, any pressure on the pricing. We are not – the wages have – the wage revisions have been given effective June 1. We had a full quarter impact in Q2 and our margins dropped a little bit on that, but we are working towards improving upon the margin in the next two to three quarters. So, overall, the demand looks – continues to look stable. The pricing, there is no download pressure, looks stable and the budgets have not been frozen, and the momentum continues towards offshore.

George Mihalos – Credit Suisse

Okay, great. So, I'll kick off the Q&A and I think probably good place to start will be with the managerial changes. Maybe you can talk about some of the changes that have been implemented from early on in the calendar year, how that benefited the company and again your sense as to when Wipro will be able to return to that consistent growth that is more in line with some of your faster growing peers?

Sridhar Ramasubbu – Chief Financial Officer

Yeah, partially, I answered this question on re-org. What happened was we had before the new CEO had come we had a joint CEO structure which was partly necessitated, because we had integrated a billion dollar business with India and Asia-Pacific into the IT business – IT services business. So, we had two joint CEO structure, plus it is the recession time, so we had quite an extra bandwidth, but for once the recession got over, because of over tightening of the supply chain, we thought of lost out on discretionary meeting, fulfilling the discretionary spend, which happened in June quarter and September quarter and because of various other reasons we had to effect a change.

So, we got away from the joint CEO structure. We have a single CEO now. And one of the first things which he has addressed is that there is lot of confusion in front of the customer that the geography, the verticals, the service lines, and the strategic alliances fees. All of them were navigating and then trying to talk to the customer, which was not giving a single-phase. So, what we did was we have implemented a single access, the vertical owns the customer, and service line does the competency building, the geographies collapse under respective verticals and the strategic alliance fees tax under the respective technology platform. So, this has worked out well. This called for some bold moves, because some of the leaders in service lines and strategic alliances, senior people who are facing the customer had issues.

There is some people who left, but the organization largely has fallen in place and single-access also is a sort of a F&M rationalization, which will help us reinvest in the business in sales and marketing, which you had done so. And then it came the second level leadership change based on the possibility of first level leadership and that has sort of worked out – so far has worked out well. And those things are in place. Then we have to look at some processes and we looked at those processes and started working on that, supply chain is one of them, and so work is on going on and then we have made a considerable progress on that front as well. So, overall, we have done what we need to do and that's behind us now.

George Mihalos – Credit Suisse

Okay, great. And then just to kind of wrap up on that point over the last couple of quarters, there were some retention issues, those seem to have been mitigated somewhat this latest quarter or we've set now for improvement on that front going forward. Do you think those issues are now behind the company?

Sridhar Ramasubbu – Chief Financial Officer

Yeah, we had addition close to about 23% quarter back last quarter after the MSI, which we gave in June 1 and addressed some of the progression issues, things are under control. We dropped about close to 400 basis points. In addition, we have close to 19% – 18.5%, 19%, which we think which we can go down a little bit more. The industry is about 16% to 17%. We have a technology group. We have about 27% of revenues come from the technology, which is there is a churn there, because of the talent which is demand. But overall, I think the MSI which we have done in June and the certain actions which we have taken to address those retention issues have helped us address them and we have – we are in good shape as far as attrition is concerned.

George Mihalos – Credit Suisse

Okay, great. If we could go back to sort of the demand environment and you are talking about a fairly stable global environment. It sounds like than what have your competitors was out recently saying there has been some delay in closing some large deals that seems to not be the case thus far at Wipro, was that safe to say?

Sridhar Ramasubbu – Chief Financial Officer

Yeah. I mean, except for one investment banking customer who is an existing customer who had delay of signing by about four weeks. We have not seen any deal closure delays in Europe. In Europe, we are fairly well spread if you look at the UK about 45% to 50% of revenues come from UK mostly concentrated energy utilities and then we have Germany and France the next two biggest IT budget countries, where we have country structure, which is trying to leverage that and we opened up in South Africa. And the other places are more large customer focused like Alcatel, Nokia, and some of those telecom customers. So, I would say that in terms of relationship and in terms of the pipeline which we get from these places are continued to be strong and we are not seeing (any effect) of that.

George Mihalos – Credit Suisse

Okay. And maybe we can did down a little bit more into verticals and maybe where you are seeing potentially little bit of push back versus where things are just kind of rolling long. Is it safe to say that the weakness still remains specific to you, investment banking and maybe the telecom area and the other verticals that you are engaging in seemed to have the same momentum that they had over the last couple of quarters. Is that fair to say?

Sridhar Ramasubbu – Chief Financial Officer

Yeah, I think BFSI has done well. I mean, BFSI though there were couple of customers, we are saying that we have a problem there, but what we said was that one customer in Europe, who delayed it. And in terms of there was response to your question, how do you look at the budgets for next year? We said it's too early to say, but there could be a very small moderation in couple of customers' investment banking, but that doesn’t mean the investment banking is weak. We did 5.3% sequential growth last quarter and the pipeline on order booking and some of the very large deals, where we have signed up in BFSI sector. So, I would say that sector is doing very well and showing tremendous growth for us.

The other portion is that GMT, the media telecom portion, I think that has got structural weakness in terms of that is doing well, but in terms of comparatively if you look at the company growth versus that growth, there is a differential it lacks the company growth. We think – we have very good business on the telecom side. We are working with the top telecom vendors in the market almost all of them. And we have got very good wallet share in those telecom with those telecom customers. The market is little bit hurting there. So, the market has to open up, but we are – clear cut, we have got leadership position there and think they can use that leadership position to further strengthen our position there. But the fact is that, that’s growing at about 12%, whereas the company is growing 18%, 20% so that will always be a catch up for us in telecom lagging the company growth. That’s the problem there. It’s not the problem of not growing. It's not a problem of somebody not doing well. We got very good market share and leadership position in telecom as well.

George Mihalos – Credit Suisse

Great. And just on the competitive front, maybe you can talk about what you are seeing out in the marketplace seems the competitors continue to be rational in going about signing their deals, any clarity you could add – you could add in that regard?

Sridhar Ramasubbu – Chief Financial Officer

I think the competition continues to be the same and same place. And I think good amount of rationality is there. There is no panic contract. There is no dropping up prices for just getting being opportunistic. There are messages to the market about some of the competition trying to drop prices, but I don’t think we have seen many such instances. I think the price rationality and deal rationality is still being preserved.

George Mihalos – Credit Suisse

Okay. And just taking a price, you guys are doing a good job of further penetrating your existing clientele, given that you are doing that so successfully, is there a fear that down the road you could incur more pricing pressure, if the demand environment stays uncertain couple of quarters down the road?

Sridhar Ramasubbu – Chief Financial Officer

We don’t want to be speculative in terms of future market. At this point in time, what we have seen is there is no pushback from the customer for any download pricing issues nor we see as a trend that pricing could come under pressure. I mean, we think and we wish that the stability in pricing situation continues. If the coming quarters deteriorate what will happen, that’s sort of speculative one. We don’t want to comment on that.

George Mihalos – Credit Suisse

Got you. So, maybe you can talk a little bit about the BPO business, you mentioned it was a bit of hiccup this last quarter, maybe talk about the steps you are taking to sort of reaccelerate broad growth there and also and just give a sense as to how much of that BPO business is still call center? It's the minority now right.

Sridhar Ramasubbu – Chief Financial Officer

Sure. Yeah, when we acquired the company in 2002, we had predominately almost 80%, 85% that's come from the call center and we changed the rhythm of the business today. I would say almost 50%, 55% is transaction processing, which is not a call center business, but the good part is that we are able to address in BPO end-to-end a product support, a customer support, consumer care, customer care as well as the transaction back-office operations, which is payroll finance and HRO – the HR benefit things. So, the presence of the call center facility gives us a complete range of solution, which we can address the customer and that has helped us in doing so. But to answer the question specifically, yes, we have reduced the dependency on call center very significantly and that has helped us use the time shift, which is in the morning between 8 o’clock to 5 o’clock in the evening and that has helped us to address different solutions.

What happened in BPO is that, there are redeems and when the – it also, the rhythm of the business reflects the market, if there is a recession or slowdown in the market, the number of transactions, the volume comes down. So, there is a reflection on that and there is a leadership change as well in the month of April in BPO. But the pipeline, the number of deals, we are winning number of deals and the order booking are continued to be strong. The solutions, which we are offering to the market, are finding good reception. They are people – and what we are seeing also in the pipeline is it's just not an IT pipeline or a BPO pipeline, but we are seeing an integrated IT BPO pipeline, which is coming to our advantage, because we are strong in both and we have a leadership position in BPO.

So, today we will tell you – we were about 9.5% to 10% of revenue from BPO. We have today about 9.5%. We think there are very good opportunities in the market, which will help us scale up in BPO as well.

George Mihalos – Credit Suisse

Okay. And just historically Wipro has had some businesses that don’t seem to have a lot of synergy with your core IT business, the consumer lighting business comes to mind. What are the plans with that business going forward, any chance that, that would be divested?

Sridhar Ramasubbu – Chief Financial Officer

I mean, divesting is an opportunistic thing. What that business is generating cash flow, that business is running profitably and there is no management attention dilution as far as those two businesses are concerned. In fact in infrastructure engineering, we are probably the largest third-party exporter from India on that area. So, it’s got brand value in consumer care. It’s got huge infrastructure investments which are being made by the government in India. So, we see very positive about those two business units. However, if there is an opportunity to divest and if it makes business sense, we'll definitely have a serious look at it. At this point in time, there is no dilution and the IT business is about 88% of the revenues and 95% of the net income. So, the whole focus in IT business including one of the strongest IT services business within India and Asia-Pacific. Do you want to ask some questions on the…

George Mihalos – Credit Suisse

Sure. I think there is a question in the back over there.

Question-and-Answer Session

Unidentified Analyst

Just a quick question on wage inflation, if you can maybe talk a little bit about your expectations around what to expect for 2012 on wage inflation? And if there is obviously I know it doesn’t sound like it’s going to be the best pricing environment, how do you offset wage inflation, so it doesn't affect your op margins?

Sridhar Ramasubbu

Yeah. So, the wage inflation in India is a direct correlation to the market demand. And when the market demand in the global IT services market increases, automatically there is scrambling for the same engineers pool, which is available in the market and both the global consulting companies and the Indian companies are vying for the same resource. So, to the extent that there will be a pressure on wages and last June we gave a 10% to 12% increase for offshore people, about 2% to 3% for onsite. And that is sort of we are not seeing that at this point in time. It has helped us to address the attrition. It has helped us to address some of the concerns the market had, but the freshers – at the freshers level we have not majorly increased the salaries.

What would be the projection for wage inflation is tough to call. It depends on the market, because the market is still uncertain. Europe is still not, we don’t in the limbo. December 9th is the consensus meeting. Hopefully we’ll see some light in the day. But the good part is that if you look at this wages, about 16%, 17% of the wages have got a variable pay. So, at any point in time though we have given this 10% to 12% increase, at any point in time if there is a lack of availability, lack of performance of the business, lack of individual performance that gets moderated. People don’t get pay the variable pay. So that’s automatic auto adjustment, which happens on the wages depending on the external market performance and the company’s performance. So, we have some sort of mitigation there in terms of how the wages plays for the margin.

On the pricing front, we already discussed that there is no -- though we drop from the realization base due to STP order, but more of a quarter operation and there is no pricing pressure on coupon rate basis. We think that and there is no drop there and there is not download pressure from the customer. So, we think we’ll continue to build on that. The one thing that we are trying to control on the wages is that we have that one to three year population is a bit higher as compared to competition for us and we are trying to balance by recruiting more freshers from the campuses.

George Mihalos – Credit Suisse

Any other question in the audience? Okay so I’ll carry on. Just on that basis again, outside of your home Indian market, what are the offshore low cost countries are attractive from your perspective for hiring, whether it’s enough bandwidth and enough skill set?

Sridhar Ramasubbu

Yeah, so the question has got two aspects. One is the low cost center and the second is the sourcing, the global sourcing, talent sourcing. I think talent sourcing has got huge opportunities, but the cost basis is still much higher as compared to India. So, we are tracking about 11 to 12 locations across the globe, which has got potential to offer the services. But most of the locations, where we have seen the cost arbitrage or the labor wage arbitrage is much, much higher than what India has to offer both in terms of talent suppliers as well as the cost basis.

So, some of the areas, which will come closer, is China, but China has got its own challenges in terms of doing business. So, their cost is actually going up. The Shanghai -- the Chengdu cost is very close to what we have in Bangalore. So, it’s not that cheaper. But what is happening is that with the globalization efforts, many of our customers in developed countries are moving to LATAM, Asia-Pacific and various other countries. And here is an opportunity for us to align ourselves with the customers’ clarity. So we go and be present there, along with the customers in new locations. So that gives ways to some of the low cost centers or the development centers, which we are necessitated to establish whether in Brazil or Mexico or Argentina or Colombia or Australia or Singapore, Korea and Thailand.

So, that’s more based on the customer pull, rather than what we are trying to do. We have our experimental strategic development centers. One we established in Atlanta and one in Reading, UK. Both are running successful. In 2007, we have started Atlanta. We wanted to add about 500 local jobs. We have done about 650, 80% of them are local recruits and that number is likely to go about with 200 in the next three to six months. And now we are looking -- we’re trying with idea of looking, should we look at another center to cater the needs of the customers in the U.S. So, we are excited in terms of some of this opportunities that are present, they are presenting themselves in terms of globalization and setting up centers and serving our customers in the locations, where they are doing business.

George Mihalos – Credit Suisse

Okay. So I think we’re going to need to wrap up. Sridhar, I want to thank you so much for your time. Thank you.

Sridhar Ramasubbu – Chief Financial Officer

Thank you so much

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