Wipro Limited Q4 2006 Earnings Conference Call Transcript (WIT)

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[[ more ]] April 19, 2006 3:15 AM ET

Executives

Azim H. Premji, Chairman and Managing Director

Suresh Senapaty, Chief Financial Officer

Girish S. Paranjpe, President, Finance Solutions

Sudip Banerjee, President, Enterprise Solutions

Dr. A. L. Rao, Chief Operating Officer

Suresh Vaswani, President, TIS & Interops

Ramesh Emani, President, Product Engineering Solutions

T. K. Kurien, Head BPO Unit

Pratik Kumar, Corporate Vice President, Human Resources

K. R. Laxminarayan, Investor Relations

Analysts

Mahesh Vaze, BRICS Securities

Sameer Goel, Albany

Divya, Motilal Oswal

Mithali Gosh, DSP Merrill Lynch

Sudip Bhattacharya, UBS

Ananthanarayan, JM Morgan Stanley

Pratik Gupta, Citigroup

Bhuvanesh Singh, CSFB

Anthony Miller, IS Research

Hitesh Zaveri, Edelweiss Securities

Priya Rohira, Enam Securities

Girish Pai, East India Securities

Nitin Jain, Bank of America

Shekhar Singh, ICICI Securities

Operator

I’m Prathiba, the moderator for this conference. Welcome to the Wipro Conference Call. For the duration of the presentation, all participants’ lines will be in the listen-only mode. I will be standing by for the question and answer session. I would now like to hand over the call to the Wipro Management. Thank you, and over to Wipro.

K. R. Laxminarayan, Investor Relations

Thank you Prathiba. Good afternoon ladies and gentlemen. The Investor Relations team at Wipro comprising of Sridhar in US and Jatin and me, Laxminarayan in Bangalore, welcome you all to this call. We’re delighted that you’re with us today. Today, we discuss Wipro’s performance of the fourth quarter in the year ended March 31, 2006, and to do that we have Mr. Azim Premji, Mr. Suresh Senapaty, and other members of Wipro Senior Management. We will as usual begin the call with Mr. Premji and Mr. Senapaty commenting on our results, and after that we will have adequate time to take your questions.

As a reminder, some of the statements we make on this call maybe forward looking within the meaning of the Private Securities Litigation Reforms Act of 1995. These statements are based on our best view of the world today and our businesses, and these elements can change as the world changes. These are also subject to known and unknown risks and uncertainties that can cause the actual results to differ materially from those expressed or implied in our discussion. Such risks and uncertainties include but are not limited to the risk factors explained in detail in our filings with the SEC of USA. Wipro assumes obligation to update the information presented on this call. The conference is being recorded and will be archived, and a transcript will be available on our website at www.wipro.com. With these brief introductory remarks, let me hand over the call to Mr. Azim Premji, Chairman, Wipro.

Azim H. Premji, Chairman and Managing Director

Good morning ladies and gentlemen. By now you would have seen our results for the year and quarter ended March 31, 2006. As the management team would be happy to answer your queries, I’d like to take some time before that to share some thoughts on our performance and our prospects.

The results of 2005-2006 were immensely satisfying on many fronts. During the year, we made strategic acquisitions, made several organic investments for accelerating growth, drew up an aggressive strategic plan, added the highest ever number of people to our team, and streamlined and patterned our organization structure. Through all of this, we deliver industrial-leading revenue growth in all our business. It has recorded strong profit growth, stabilized margins, and crossed several landmarks in the process. I believe that our solid performance is yet another pointer to the resilience of our business models and more importantly the unflinching spirit of Wipro’ites.

The results also proved yet again that to reap benefits tomorrow you need to sow the seeds today. In the past, we invested in incubating newer services such as technology infrastructure services, testing services, and total outsourcing, and in new geographies such as Europe and the Middle East. Notably, our R&D services business and Europe bureau crossed milestone of $0.5 billion in revenues this year in each of them. It is very heartening to note that the strong growth in our global IT business last year was driven by areas where we have invested proactively in the past. Similarly, our investments in innovation initiatives are beginning to pay off well. Innovation initiatives contributed 5% of our revenue for the fiscal. Many of our strategic customer wins including some key ones in the recent quarter remain possible because of the breadth of our services and because of our innovation initiatives.

Similarly, in our India, Middle East, and Asia-Pacific IT business, we delivered strong revenue growth of 22% and profit growth of 40% in 2005-2006. But more importantly, by winning five total outsourcing contracts, we have set the platform for sustaining our heights. The more recent win of Rs. 360 crores, equivalent of $80 million, total outsourcing contract from HDFC Bank, is an indication not only of India’s maturing IT market but also Wipro’s growing competence in this unique, specialized service line.

With the strategic as well as operational success of 2005-2006 behind us, we look forward to 2006-2007 and beyond with excitement and with enthusiasm. The offshore IT industry is evolving from a simple service provision mode to a more complex and higher value-added knowledge creation mode. Delivering value to our customers in the emerging scenario will require a comprehensive for timeliness combinations of the domain expertise, integrated service offerings, innovative solution structuring, and deep technical expertise. We have identified and ruled out initiatives in our strategic and operational plans in this direction. We are confident that this will be a significant differentiator for us that will enable us to continue to lead industry growth rates.

Additionally, inorganic initiatives can help accelerate this process and supplement organic growth rates. Our experience with acquisitions so far has been quite satisfactory. This has given us confidence to pursue this strategy more aggressively in the future. We will similarly pursue strategic initiatives identified in our strategic plan to deliver strong growth in future in all our businesses. Clearly, Wipro businesses are all in the sweet spot of strong growth. We have the baseline to leverage the opportunities and realize our growth potential. At the same time, we will continue to invest to build the next set of growth engines that will help Wipro deliver sustainable and profitable growth in the future too.

I would now request Suresh Senapaty, our CFO, to comment on financial results before we take questions.

Suresh Senapaty, Chief Financial Officer

A very good morning to all of you ladies and gentlemen. Before we take on the questions, I’ll touch upon areas in our performance and financials that would be of interest to you all. Let me start with beginning the composition of our growth.

During the quarter ended March 31, 2006, we had sequential revenue growth of 8.2% in our Global IT Services Business, which comprised of 8.2% revenue growth in the IT services and 8.5% growth in the BPO services. The 8.2% growth in the services component was driven by 7.4% growth in the volume of business and an increase of 3% in realization for work account one side and 0.2% increase in price realization of our offshore projects. Revenues from acquisition of NewLogic and mPower contributed 1.8% to revenue growth of global IT segments.

On the Forex front, our realized rates for the quarter was totally Rs. 5.23 versus the rate of Rs. 44.83 realized for the quarter ended December 2005, and at the period end, we had about $600 million of ADS that ranged between Rs. 44.60 and Rs. 45.50. We had effected an increase of approximately 3% in compensation for our onsite staff, effective January 1, 2006. We also saw the full impact of salary hikes given to our offshore staff during the quarter. The impact of this competition revision was 1.4% on our operating margins. Operating margins were also affected by losses in Wipro NewLogic, which was in line with our expectation. On the other hand, we saw better price realization improvement in utilization, increase in proportion of offshore projects, and better Forex realization.

Our BPO business continues on the right track by delivering yet another quarter of operating margin expansion apart from improved revenue growth. These factors helped us not only to absorb the download pressure but also improve our operating margins by 30 basis points on Indian GAAP. For the quarter ended June 2006, we expect quarter led growth to broadly stable price realizations. While lower profitability from acquisitions would continue to impact the profitability, we will endeavor to maintain our operating margins in a narrow range. We’ll now be glad to take questions.

Question-and-Answer Session

Operator

Thank you very much sir. We will now begin the Q&A interactive session. Participants who wish to ask questions may please press “*” and “1” on your touchtone-enabled telephone keypad. On pressing “*” and “1” participants will get a chance to present their questions on a first-in-line basis. Participants are requested to kindly use only handsets while asking a question. To ask a question please press “*” and “1” now.

First in line, we have a question from Mr. Mahesh Vaze BRICS Securities.

Mahesh Vaze, BRICS Securities

Hi sir. We have had a very strong quarter, as a matter of fact the best quarter in the industry, but our guidance on a sequential basis is a bit muted at just over 4%. Could you flush that out, what’s the reason?

Suresh Senapaty, Chief Financial Officer

I believe, Mahesh, if you look at our overall growth that we’ve achieved in the previous two quarters, the customer adds that we’re seeing in terms of 42 customers last quarter and 171 customers in the previous 12 months, the kind of traction we’re getting in terms of existing customer base growth also, the number of customers $1 million has gone up from about 210 to 221, a number of $50 million runrate customers have gone up from 2 to 4, and it gives us the confidence that the 2006-2007 outlook is fairly good and therefore we continue to deliver better than what the industry average growth would be for 2006-2007. However, if you look at quarter one, I think we cannot be short term about it, we have to look at it overall from a longer term perspective to medium-term perspective. So, where quarter one is concerned, if you look at some of the YOY growth perspectives, it is about 34%, if you look at the guidance number. Generally, for us the quarter one has not necessarily been a very high sequential growth quarter.

Mahesh Vaze, BRICS Securities

Secondly sir, the gross margins in the Indian IT business have fallen…sequentially they usually fall, but even YOY basis they have fallen, so is there something specific that happened this quarter?

Suresh Senapaty, Chief Financial Officer

Gross margin in the Indian IT business, if you look at it is similar, Mahesh.

Mahesh Vaze, BRICS Securities

At about 19.4 versus…about 50 blips fall YOY and sequentially the fall is about 550 blips.

Suresh Senapaty, Chief Financial Officer

Sequentially because you have a mix of product in the quarter four’s and quarter two’s which tends to be a little higher. By services generally sequentially growing quarter up to quarter, the product revenues get to be SKU’ed in quarter two and quarter four, and they have generally a lower margin than on the services. So that sequentially is yes, your observation is right, but not compatible on year on year.

Mahesh Vaze, BRICS Securities

Anyway, I’m going to…Sir, the third thing is, in terms of large deals, now one of your competitors is pursuing them very aggressively whereas another one is talking of large deals being not so good for the business, they’re locking into rates which might not be the best strategy going forward because the rates might actually go up and the clients stand to negotiate very aggressively when they are negotiating large deals. What is your sense, I mean how much should a company pursue large deals, what could be the impact of large deals on profitability?

Suresh Senapaty, Chief Financial Officer

That’s the point Mahesh. Therefore, the important factor is try to be selective, which one to take and which one not to, rather than jumping on every dealer. That is how our approach is. Yes, there are multiple deals which are at very, very low margins, there are many other deals which may be low margin to start with but over the lifecycle can be profitable, and there maybe some additional businesses which can pick over rate and therefore we need to look at it medium-to-long term rather than sacrificing just because on a shorter term basis there is no money or the margins are lesser. So, it is important to be selective in a deal-to-deal basis, because one cannot say that all the deals which you’ll be fighting…because all of them are useless. Selectiveness is very important, and a lot of history is available in what you call big IT vendors who have lost a lot of money on deals which they have not been smart enough. I think we being the later beginners, there is at least the history and experience available for us to pick up from there and not to be bitten.

Mahesh Vaze, BRICS Securities

Thanks a lot sir. Just one last thing, you mentioned this figure in your initial remark, about the onsite salary hike causing a quantum of impact, I missed that, if you could repeat that.

Suresh Senapaty, Chief Financial Officer

I said that on the onsite we had given a compensation increase of about 3% effective 1st of January, and in the offshore we had given a compensation increase in November 2005, which had impacted the quarter three by two months and quarter four by three months, that means an additional one month. So all that impact was about 1.2%, which was mitigated through varieties of other reoperation improvements, in terms of utilization, offshore mix, etc., etc., so overall we’ve seen in the Indian GAAP a 30 basis points expansion.

Mahesh Vaze, BRICS Securities

Okay, thanks a lot, thank you very much.

Operator

Thank you very much sir. Next question comes from Mr. Sameer Goel of Albany. Please, go ahead sir.

Sameer Goel, Albany

Hi gentlemen. My question relates to the margins. Actually in the current fiscal we saw a 200 blips decline in margins. What’s our take going forward and at what levels the company would have steady set margins?

Suresh Senapaty, Chief Financial Officer

Actually, if you look at YOY, I think your observation is right.

Sameer Goel, Albany

I’m talking about YOY, I’m talking about a longer term 2007-2008, what would…

Suresh Senapaty, Chief Financial Officer

Got it, got it. So, we have seen a fair amount of regain in the margins after the initial blips we had got, and now we are currently looking at the stability, and what we are saying is why there are a lot of opportunities to be able to improve our margins, whether in terms of bulge, or utilization, or offshore mix, and other productivity improvements. There are pressures with respect to compensation increases and so on. Price is the main point of we’re seeing a fair amount of stability rather than a lot of high increases in the pricing. So, given this scenario, there are lots of pluses and there are lots of minuses. So, we think in a short-to-medium term, the margins will be within a narrow range.

Sameer Goel, Albany

Okay, fine. The other question was related to the consulting part of business. In the last two financial years, we are seeing a decline in consulting revenues from 1.5 billion to 1 billion and now up to 0.95 billion; could you elaborate a little bit more on that, what’s happening there?

Sudip Banerjee, President, Enterprise Solutions

Yeah, it’s Sudip Banerjee here. Yes, your observation is right. Consultancy goes through short cycle revenues which we get because the projects are of typically eight weeks or six weeks’ duration. So, we have periods where they go up and again periods when the consultancy revenues are not high. I think the important way that we look at consulting is whether it is additive to the rest of business. We find that in the last six months many of the business that we’ve gone in the other areas, the wins have come largely because of the consultants that we have. So, today we have roughly, between the consultants under the Wipro consultant umbrella as well as the consultants who are embedded in all our industry verticals, about 320-330 odd people, and many of the profiles of these, typically the consultants who we have under Wipro consulting, they are practitioners from firms like Accenture, McKenzie, Deloitte, KPMG, etc. They have been able to substantially uplift the profile of the clients that we have been wining in the last six months and have been getting us an early engagement. So, we don’t necessarily measure consulting revenue and see that as the only yardstick of consulting performance. We see the wins that we’ve got in all our other businesses as a real value of consulting to us. So, we continue to invest in getting more and more consultant profiles, because they’re helping us in our overall business.

Suresh Senapaty, Chief Financial Officer

So, the way to look at it: a) we have a direct consulting revenue which is generating consulting revenues and profitably, and while doing that a part of that, depending upon which project or who is more specialized, they do help in terms of trying to address a strategic deal for our normal business in terms of whether it is application development, EAS or anything, etc. So, which in other words means while we were driving the growth in the direct consulting revenue, we were also benefitting out of the same consulting drive for getting bigger wins and enhancing our credibility with the customer and enhancing our share of volume in the large customer potentials that we see on existing customer base.

Sameer Goel, Albany

And last two data points which I missed actually, the salary hike figures for the year and the hedges figure?

Suresh Senapaty, Chief Financial Officer

The hedges that we have apart from what we’ve been applying into the outstanding receivables at the end of March 2006 is about $600 million, largely US dollars and the cost increase was given for offshore effective 1st of November, so the impact of that was felt for two months in the December quarter, and the impact of that in the March quarter is one additional month. We had also given about 3% increase in the onsite wages effective January 1, 2006.

Sameer Goel, Albany

What is the offshore increase in salaries?

Suresh Senapaty, Chief Financial Officer

Twelve percent.

Sameer Goel, Albany

What is the planned increase for next year?

Suresh Senapaty, Chief Financial Officer

We have not shared that because what we do is instead of deciding a number now, we sort of take it steadily at that point in time and try to see what are the normal compensations across to those kind of benchmarks and based on that we decide. So, even if we have a number it could undergo change depending on what the actual real situation at that point in time is. But generally, you have a number available because the industry talks about an increase between 10-15% and generally works around 12% kind of a range.

Sameer Goel, Albany

Just one more question, actually in this quarter we saw a sequential increase in pricing and onsite revenues, is this one of kind stuff or are we seeing some changes in pricing scenario going forward?

Suresh Senapaty, Chief Financial Officer

Yeah, we have seen that pricing realization increase in the onsite as well as offshore — offshore is very small but onsite is very high — primarily because what we had lost in quarter three because of less number of working days, we regained a significant part of it in quarter four…had gone up significantly.

Sameer Goel, Albany

But no changes in the pricing scenario?

Suresh Senapaty, Chief Financial Officer

Yeah, it is more of a stable environment.

Sameer Goel, Albany

Okay fine, thanks and best of luck.

Operator

Thank you very much sir. Next question comes from the line of Mr. Sandeep Shah with Motilal Oswal.

Divya, Motilal Oswal

This is Divya from Motilal Oswal. My question is, BPO margins for this quarter have declined to 25.7 from 27.5 last quarter, what’s the reason for the same?

Suresh Senapaty, Chief Financial Officer

Actually from an operating margin perspective, BPO has expanded.

Sudip Banerjee, President, Enterprise Solutions

Yes, Divya, you’re looking at EBIT margins?

Divya, Motilal Oswal

No, I’m talking about gross.

Suresh Senapaty, Chief Financial Officer

Kurien will take this question.

T. K. Kurien, Head BPO Unit

Yeah, I can answer that. Basically what happens is…how gross margins depended to some extent on the training bench that we carry, and this quarter we had a larger training bench and that’s what affected the gross margin numbers. But if you look at the operating margin numbers, they kind of reflect the true picture.

Suresh Senapaty, Chief Financial Officer

In the operating margin, there has been an expansion.

Divya, Motilal Oswal

The tax rate for the quarter has also declined quarter on quarter, like 13.2% this quarter, is there any runoff item here?

Suresh Senapaty, Chief Financial Officer

Yes, that is true. About 10 crores of write back was there in quarter four, which dropped the EPS of the year and also for the quarter. EPS for the year dropped by about 40 basis points because of this one-time credit, and EPS for the quarter dropped by about 0.8%. So, normalized will be a +0.8 for the quarter.

Divya, Motilal Oswal

Thanks. Do you expect that level to stay the full year level for the next year also?

Suresh Senapaty, Chief Financial Officer

See, we are seeing more and more sectors coming out of the tax exemption period from that perspective, but there would be certain other kinds of incentive schemes that could possibly be there. So, we think on a medium term the tax rate will not be significantly different beyond 100-200 basis points.

Divya, Motilal Oswal

Thanks. One last question, attrition for the quarter was down from 14% to 16%, this is despite the salary hikes you’ve given over the last two quarters, what is the reason?

Pratik Kumar, Corporate Vice President, Human Resources

This is Pratik here. I think the primary reason has been that we did have to deal with a significant percent of involuntary attrition, which was triggered from Wipro’s end, where we did have to ask quite a few employees who had come in based on fake resumes, which we uncovered and investigated. So, it accounted for almost about 1.5% of our total attrition number, which we have shared with you.

Divya, Motilal Oswal

So, is this exercised over or you expect it to continue over the next few courses?

Pratik Kumar, Corporate Vice President, Human Resources

We have put in the processes which should prevent any such happening in future; however, you can never say that it’s completely over. Our policy of non-tolerance on such matters will continue to be as strict as ever, but we do not expect the kind of number which we saw this quarter to be repeated again.

Divya, Motilal Oswal

Thanks and congrats on a good quarter.

Operator

Thank you very much mam. Coming up next is a question from Ms. Mithali Gosh with DSP Merrill Lynch.

Mithali Gosh, DSP Merrill Lynch

Yes, good morning and congratulations on a very good set of numbers. The key thing I wanted to focus was on the wage hike that you have given in October and then again in January onsite. You know, since then there have been some concerns in the industry on actually wage pressures sort of rising and attrition levels I think across the board are also rising. So in that context, I just wanted to understand what you feel has been the trends and could this even imply that there might be need for a mid-term sort of wage hike?

Pratik Kumar, Corporate Vice President, Human Resources

Mithali, this is Pratik here. Our experience has been that around this time is the timeframe when organizations begin to ramp up, so some of the things which we get to hear, the pressure which begins to mount on companies, is usual. So, we are not seeing anything which is extremely unusual. There will continue to be pressure on middle management talent, and that’s something which we’ve experienced in the past. Seeing the way the ramp ups which are happening across, would it make us revisit our own plans of hikes when we want to time it? At this point in time, we do not think that would be necessary, but it’s something which we’ll continue to watch very carefully.

Mithali Gosh, DSP Merrill Lynch

Right, so as of now, you don’t feel that the wage pressure is trending in a direction different from what you predicted, let’s say, a few months back?

Pratik Kumar, Corporate Vice President, Human Resources

Yeah, I think the wage pressure we have to look at it in two slices. I mean, what is your proportion of people who are coming in from campuses and how many are those laterals, and we feel the pressure will continue to be there as in the past for the laterals. But, as you know, we have the head space to be able to take in more people from campuses, which is something we had embarked on almost about 18 months back. So, we have that head space, and on campus we do not see any significant movement on salary levels, which have remained to be in a very narrow range over the last three years, and that we do not see changing this year as well.

Mithali Gosh, DSP Merrill Lynch

Right, and is it possible to share what is the proportion you have, let’s say of less than three years experience in and where you sort of target to take that up to?

Pratik Kumar, Corporate Vice President, Human Resources

The last quarter we were less than three years at about 42%. That number remains to be at the same level for the reason being that this quarter the predominant hiring was of the laterals, because it’s not the season for the rookies, but predominant lateral hiring again was in the one-to-three bracket. So, the number continues to be at the same figure of 42%.

Mithali Gosh, DSP Merrill Lynch

And any sense on where you’d like to take that up to?

Pratik Kumar, Corporate Vice President, Human Resources

I think we would like to remain around the same figure or perhaps marginally go up, but we do not have a fixed number in mind at this stage.

Mithali Gosh, DSP Merrill Lynch

Okay thanks, and the second question is on pricing, where if you could give us an idea about what you’re seeing in terms of pricing trends incrementally over the last few months, both in the case of new client acquisitions as well as re-negotiations?

Girish S. Paranjpe, President, Finance Solutions

Mithali this is Girish Paranjpe. Working on the new client, we are seeing slightly better realizations coming in, and on existing clients we have done re-negotiations, again we have seen some improvement especially where the original rates were not market competitive. So, we’ve seen a kind of an improvement there. But, if I look at overall price levels, they’re in a very narrow range.

Mithali Gosh, DSP Merrill Lynch

I see, and finally just one question, you did mention in your opening remarks that quarter one has historically been a weaker quarter, are there any reasons sort of behind this?

Girish S. Paranjpe, President, Finance Solutions

Hi, Girish here again. There is no such reason. I think it’s to do with the composition of our various business lines and how budgets are spent by our clients over the 12 months, and as you know the composition of business for each of our sphere group is slightly different, so that extends…some people have a stronger first quarter and some people have a stronger second and third quarter, and I think that’s the variation that you tend to see.

Mithali Gosh, DSP Merrill Lynch

Okay, thanks and wish you all the best for the future.

Operator

Thank you very much mam. Next question comes from Mr. Sudip Bhattacharya with UBS.

Sudip Bhattacharya, UBS

Hi, good morning and congratulations on the good numbers. My first question has got to do with the GM contract, how is the winning of the deal shaping up in the form of ramp up, did it contribute in a meaningful manner in the first quarter or should it start from first quarter?

Sudip Banerjee, President, Enterprise Solutions

Hi, this is Sudip. The contract is progressing well, on schedule, as you probably know that June is the timeframe for the turnover of the existing EBS contract. So, all the selected parties are working in their transition phase and that transition is currently proceeding as per schedule.

Sudip Bhattacharya, UBS

As the deal starts in the next quarter, can we expect the margin implications because of that or this is predominantly a company asset?

Sudip Banerjee, President, Enterprise Solutions

No, I don’t think we have any specific comment on that.

Girish S. Paranjpe, President, Finance Solutions

But Sudip, we did say in the earlier comments that broadly we do expect the margins at the global IT level to be moving in a narrow path.

Sudip Bhattacharya, UBS

I see, just in terms of the future outlook from the last contract effective, do you think next year you will see larger proportion of contracts closing or do you think it will be predominantly organic growth driven by existing clients, which will be the key ramp up?

Sudip Banerjee, President, Enterprise Solutions

It will be a combination of both.

Sudip Bhattacharya, UBS

Okay, but in terms of the larger contracts, do you see any acceleration in closure or as it was in other contracts.

Sudip Banerjee, President, Enterprise Solutions

No, I think we see an acceleration in closure.

Sudip Bhattacharya, UBS

Thanks a lot and best of luck.

Operator

Thank you very much sir. Next question comes from the line of Mr. Ananthanarayan with JM Morgan Stanley.

Ananthanarayan, JM Morgan Stanley

Thanks and good morning everyone. Just one more question to Mr. Senapaty on these large deals. When you look at them or evaluate them, do you have any internal financial thresholds, do you have a certain sort of gross margin in mind, and if so how does that compare to your regular deals?

Suresh Senapaty, Chief Financial Officer

Yes, absolutely, we have parameters that we think…pattern of the contract and also we look at if there were to be a dilutiveness what is the kind of period up to which it will be diluted. So, another parameter also we look at is what kind of money we make in terms of EBIT per person in some of those deals also. Also many times you find deals where you could be making an entry into an account, which is a very large account, and through this you make an entry and then again you can build on it, because it maybe infrastructure centric or it maybe an application maintenance one, and on the top of it could be sitting an application development and many other opportunities going up the value chain. So, one has to look at this deal not only on a standalone and a short-term approach but a longer term approach and what all can add and therefore what is the kind of a bucket it’s going to have to generate profitability or cash flow, based on which you take that call. And in each of such areas we have a kind of a parameter which we go through before we bid for it or we sign for it.

Ananthanarayan, JM Morgan Stanley

Okay, a couple of questions on the just concluded quarter. The SG&A cost seemed to have gone down quite a bit in absolute terms during the quarter for the IT services business, any particular driver there?

Suresh Senapaty, Chief Financial Officer

Sorry, what is gone down?

Ananthanarayan, JM Morgan Stanley

The SG&A expenses.

Suresh Senapaty, Chief Financial Officer

Yeah, but this is a minor variation and I suppose within 50-100 basis points they will keep moving up and down.

Ananthanarayan, JM Morgan Stanley

I was referring more in terms of the absolute amount rather than the percentage on revenue?

Suresh Senapaty, Chief Financial Officer

The absolute amount has gone up.

Ananthanarayan, JM Morgan Stanley

Anyway, I’ll take it offline with Len, I guess, and just a final question…

Suresh Senapaty, Chief Financial Officer

You’re talking about Global IT services, right?

Ananthanarayan, JM Morgan Stanley

That’s right, yeah.

Suresh Senapaty, Chief Financial Officer

In the Indian GAAP it has gone up, sequentially it has gone up by 4.4%.

Ananthanarayan, JM Morgan Stanley

No, I was referring to the US GAAP number, but anyway Mr. Senapaty I’ll take it with Len after the call. Just one final thing in terms of your outlook for the next quarter, is it uniform across IT services and BPO or is there a difference?

Suresh Senapaty, Chief Financial Officer

Outlook is similar, but not necessarily the growth rate, because we had a muted growth rate so far as Wipro BPO was concerned for the last year and while…Ananth can you just repeat the question please?

Ananthanarayan, JM Morgan Stanley

My question was the guidance for the June quarter, essentially the growth trend you mentioned various reasons for the relatively muted guidance, is that applicable both to BPO as well as IT services?

Suresh Senapaty, Chief Financial Officer

There’s no significant difference, because we give a combined guidance and we don’t think it is a true material for us to give a guidance separately.

Ananthanarayan, JM Morgan Stanley

Okay, thank you.

Operator

Thank you very much sir. Next question comes from Mr. Pratik Gupta of Citigroup.

Pratik Gupta, Citigroup

Hi, I just had a quick question on the overall strategy. It looks like we’re in a very strong offshore IT environment, but just wondering given the potential revenue opportunities out there, would you be willing to accelerate your revenue growth rate, your topline growth rate and get deeper into some of your clients, etc., at the expense of some margins in the short term. And if so, I was just wondering if you could elaborate a bit more on that strategy, your thoughts on that, how important are margins to you? And secondly if you could just also update us on the various margin levers where we stand, especially in things like utilization rates and onsite-offshore mix, etc., how much more leeway do you have over there?

Suresh Senapaty, Chief Financial Officer

Yeah, coming to the first question, I suppose there is no straight answer, because what you look at is the long-term profitability rather than any one-time profitability that you look at. So from that perspective, this decision has to be rational and look at on a medium-to-long term how you get out of a deal. Then, the second point also with respect to the levers, on utilization we saw some uptake in the last quarter, and we think there is an opportunity for us to do better so far as the year following is concerned or the current year is concerned. Similarly, movement of offshore-onsite, we’ve seen a decent amount of movement in our own portfolio over the last few quarters, and going forward our objective would be to move in the same direction even further without wanting to in any manner constrain on the growth. There are certain other initiatives in terms of productivity improvements, in terms of trying to take up the fixed priced projects which will be some of the enablers or facilitators of getting productivity improvement done, and as and when you talk about larger deals, larger deals tend to be for the longer term, and longer term tends to be a little bit of a fixed price, so some of that will get achieved through that process too. So, those are some of the positive levers that we have. The negative levers we have is an MSI, that is a compensation increase, exchange rate could go either way, but as you’ve said, for about $600 million we are headed as of March end for a fairly decent realization, and net-net we think so far as margins are concerned our movement would be in a narrow range.

Pratik Gupta, Citigroup

Okay, and just another followup question on that, on the margin front, if you could elaborate a bit more on the outlook for margins in the Indian IT business, and secondly if you can just give us some guidance on the tax rate for the coming year, please.

Suresh Senapaty, Chief Financial Officer

As far as the Indian IT is concerned, we would over a period of two to three years look at improving the margins, because the service business is growing faster, more and more initiatives, more and more investments that you’re doing in that part of the business. It is trying to get much more comprehensive solution orientations in the IT services business, in the IT production services business, and typically since the services business will have a higher profitability, a higher growth in that business would have an upward trend, which is with the margins going forward. Your next question was?

Suresh Senapaty, Chief Financial Officer

BPR, the quarter four and year 2005-2006 was a little lower because of some quantum write back that we had in quarter four. Going forward, we think the movement would be between 100-200 basis points.

Pratik Gupta, Citigroup

And if I were to just ask one quick question on the acquisition strategy, I was wondering if you’d be willing to take on slightly larger acquisitions in the coming year?

Suresh Senapaty, Chief Financial Officer

Yes, we will be willing to take on but within the framework of what we have in terms of string of pearls. So, when you are trying to look at acquiring a particular skill set or filling up a particular gap, that gap can be there in a company that we’re acquiring, which is a $30 million revenue or $100 million or $200 million. The price will not hold us back not to do that acquisition, plus we don’t want to compromise on our strategy just because we want to do a $200 million or $300 million or $500 million acquisition. Therefore that is not a driver. The driver is the purpose, the strategic reason why we want to do it.

Pratik Gupta, Citigroup

So can you comment whether at this point in time you are looking at any deals of a much larger scenario versus what you’ve looking at in the past?

Suresh Senapaty, Chief Financial Officer

I can’t specifically comment, but as we go by, yes, the sizes will be sort of little larger from an earnings perspective.

Pratik Gupta, Citigroup

Okay, thank you very much.

Operator

Thank you very much sir. Next in line we have Mr. Bhuvanesh Singh from CSFB.

Bhuvanesh Singh, CSFB

Hi sir, congratulations on a good quarter. My first question pertains to your revenue guidance as such. What sort of incremental revenues from acquisitions are you building in this guidance?

Suresh Senapaty, Chief Financial Officer

This includes only the acquisition that has been announced, so not anything which is not announced.

Bhuvanesh Singh, CSFB

So, are all the acquisitions integrated or are there some acquisitions which are still left to be integrated in the next quarter?

Suresh Senapaty, Chief Financial Officer

There are about two of them for which the revenue has already ticked in. There’s another one which will tick in the current quarter.

Bhuvanesh Singh, CSFB

And what would be that revenue which you expect?

Suresh Senapaty, Chief Financial Officer

Well, we don’t give specific guidance but that’s not a large number, quarter four number of that was under $3 million, which wasn’t consolidated into ours, because the closing only happens in the current year.

Bhuvanesh Singh, CSFB

So, in your BPO revenues, while the BPO revenues have grown strongly this quarter, do you expect that in near term next one or two quarters again BPO would maintain that base our could there be some issues in that?

T. K. Kurien, Head BPO Unit

Well, this is T. K. Kurien, let me answer that question. The growth you’re going to see in the BPO business really is going to be a step function, because in the short term what we have focused around is really making sure that our portfolio is healthy and our portfolio can deliver to the operating margin guidance that we have given in the past, in terms of at least what we have communicated in terms of a range. So, that’s the objective. So there will be a step-function growth. In the next quarter, it’s going to be flattish and the growth would really kind of come on the following quarters. So you can really expect big jumps and then a flat road as we consolidate.

Bhuvanesh Singh, CSFB

One thing on BPO, you had earlier talked about reducing the voice-based business, so what are the targets say one year forward or two years forward or whatever, and how do you think that you’ll achieve that?

T. K. Kurien, Head BPO Unit

Here, what we have done over the past one year, actually when we look at a deal we really don’t break it up nowadays between voice and non-voice, because we have changed the way we sell. Now, we sell solutions which run around an entire process, which runs from end to end, and that includes some component of voice and some component of transaction processing. So today if you look at integrated fields, the way we define it, it’s running at around 20%. Last year same quarter we were probably running at around 6%. So that’s the change that’s happened in the last one year.

Bhuvanesh Singh, CSFB

So, the number of deals which are pure voice deals, would that proportion be 80%, that’s excluding the integrated deals or is that…

T. K. Kurien, Head BPO Unit

We haven’t sold a single voice deal last year, a pure voice deal. Does that answer the question?

Bhuvanesh Singh, CSFB

To some extent, okay. Thanks on that. Sir, the second question is on large deals —to Mr. Senapathy — sir, we are seeing a lot of wage inflation and talk about that in the market right now, so when you bid for large deals what sort of wage inflation do you build in that, and are you worried that the higher than expected wage inflation could lead to some margin attrition there?

Suresh Senapaty, Chief Financial Officer

I think when you talk about a longer term deal you look at review engineering opportunities, you talk about offshoring opportunities, you talk about the productivity improvement that you could put into that, and also talk about therefore a factor into the compensation increase that will happen and the kind of mix that you can drive there within that after zero experience versus up to one year’s of experience of the project, then after two years of experience of the project. So, all these are taken into account for trying to do a margin assessment and getting into the deals. So, these days, yes, and if this component is a large component and this component goes out of VAT, of course it will be of concern. But at this point in time, whatever we have, whatever we’re building, and what we’re seeing as a situation, it has not necessarily given us any kind of a huge concern.

Bhuvanesh Singh, CSFB

Sir, broadly can you share that when you bid for these deals, what sort of wage inflation you keep in mind over there?

Pratik Kumar, Corporate Vice President, Human Resources

Between 12% and 15% in India, 3-5% overseas.

Bhuvanesh Singh, CSFB

Sir that’s very helpful, thank you.

Operator

Thank you very much sir. Our next question comes from Mr. Anthony Miller of IS Research.

Anthony Miller, IS Research

Yes good morning gentleman. My question is, if you could please give us a bit of view on your hiring plans during fiscal ’07? For example, how many campus offers you have out there, what is your likely mix of freshers versus laterals in ’07, and where you see head count sort of ending up at the end of the year?

Suresh Senapaty, Chief Financial Officer

We sort of work out head count increase to be able to meet our growth numbers, to meet our revenue as opposed to sort of getting into targeting some kind of a head count addition. Based on whatever projections we have on revenue, we plan it out in terms of hiring, because we still have a decent percentage of our hiring done through laterals, which is a much, much shorter time frame as opposed campus, and hence we do not specifically share any data with respect to exactly what that number is.

Pratik Kumar, Corporate Vice President, Human Resources

This is Pratik here. Specific to the split between people who would be coming in from campus versus those from laterals, the split would be roughly 50/50.

Suresh Senapaty, Chief Financial Officer

And the bulk mix we talked about, we have laterals fixed at about 42% of the people less than three years, and based on the mix that Pratik talked about, we would expect that to go up.

Anthony Miller, IS Research

Thanks very much.

Operator

Thank you very much sir. The next question comes from Mr. Hitesh Zaveri of Edelweiss Securities.

Hitesh Zaveri, Edelweiss Securities

Hi, my question is with regard to the HDFC Bank deal that you’ve won. Will you be able to deliver simultaneous services to your clients within the US over the next two to three years? Is the company gearing up to procure total outsourcing, and what is the timeframe for the same? Thanks.

Suresh Vaswani, President, TIS & Interops

This is Suresh Vaswani here. We have launched total outsourcing service globally as well, so we would be bidding for similar contracts globally like we’ve bid in the domestic market. So, HDFC Bank was one, Sanmar was the other one, SBI was the third one, so based on the same value proposition we are also bidding for customer contracts globally.

Suresh Senapaty, Chief Financial Officer

Hitesh, just to take it forward, while HDFC Bank has been more like an infrastructure deal, we have some initiatives in terms of a large deal on the application development side, _____we need to throw some flavor there.

Sudip Banerjee, President, Enterprise Solutions

Yeah, Hitesh, we now have a fairly good experience with large deals, particularly the ones which were RFCs, which were bid out in 2005. Some of them have closed in 2006, and we have a healthy mix of application and infrastructure in them. In fact, we have just signed another large deal of $100 million, which we unfortunately don’t have client permission to announce at this stage. But with all these deals, one of the things which we do find is that the mix is very much application as well as infrastructure.

Suresh Vaswani, President, TIS & Interops

Typically in total outsourcing type of contracts of the HDFC kind there is a mix of application, there’s a mix of infrastructure, and it tends to be in the ratio of 60:40.

Hitesh Zaveri, Edelweiss Securities

Suresh, what kind of margin implication, if you extrapolate such kind of deals to your clients in the US and Europe will have on your overall margins? Secondly, whether you would end up being one of the prime vendors for your end customers? I’m just trying to understand what kind of annuity is going forward can you build in your business and in the global IT services business?

Suresh Senapaty, Chief Financial Officer

It is to build a fairly decent percentage of our revenue coming through this kind of thing, particularly when you have a larger base, and you want to grow on an application development and maintenance side, we need to do more and more of these kinds of deals, and consequently target a particular percentage of an order book, a particular percentage of revenue getting into this quarter.

Suresh Vaswani, President, TIS & Interops

To one of the two questions you asked, this total outsourcing model also lends itself to a partnership model. So, frequently we will find ourselves in the position where we are leading the overall customer proposition, but we’ve tied up with multiple partners. They could partners who have strong on-ground maintenance service available in the geography, they could be telecom service provider partners and so on. So the model lends itself to making sure that we deliver a single point interface with the customer in terms of his IT operations, but it could mean that we partnered with two or three partners of ours and we are getting the whole contract.

Hitesh Zaveri, Edelweiss Securities

I appreciate it. Just one more question with billing rate. You did mention earlier that you expect the same to be moving in a very narrow range. The impression I have obtained from the discussions is that probably the market opportunities are slightly better than that. It is possible probably in the current year that the billing rate could actually inch up, say about 4-6% in both onsite and offshore, does it look unlikely?

Suresh Senapaty, Chief Financial Officer

We would like you to be right, Hitesh.

Hitesh Zaveri, Edelweiss Securities

But how narrow a range are we talking about?

Suresh Senapaty, Chief Financial Officer

No, we didn’t say narrow range. Narrow range is our operating margin guidance, but what we talked about the pricing was, we said it is more stable.

Hitesh Zaveri, Edelweiss Securities

Stable in which sense, does it mean not much of movement from the current levels?

Suresh Senapaty, Chief Financial Officer

That’s right, that is what stability is.

Operator

Our next question comes from the line of Ms. Priya Rohira with Enam.

Priya Rohira, Enam Securities

Hi, congratulations on a good set of numbers. Actually when I go through your client market, if you compare from the second quarter FY 06 to the fourth quarter FY 06, there has been a noticeable change with respect to the $3-5 million and the $5-10 million bucket. If you could throw light, whether it’s largely from the ramp up with respect to the sales team, efforts of which were made in the first half of FY 06, or is more to do with higher investments in the service offerings, or is more to do with ramp ups with clients in the BFSI and the telecom space. As an add-on question to it, if you could highlight what further strategies would you need on the sphere side to improve the client mining?

Suresh Senapaty, Chief Financial Officer

There has been a very serious effort from our side to invest in resources and our attention on high-potential clients and also to create a formal organizational structure and a kind of a tracking mechanism to make sure that we kind of devote our best resources to our top clients and make the relationship grow. I think what you’re seeing in the account growth is really a pay off of these kind of efforts that we’ve made.

Priya Rohira, Enam Securities

So you give a higher weightage more on the sales effort in terms of these noticeable changes?

Suresh Senapaty, Chief Financial Officer

Absolutely.

Priya Rohira, Enam Securities

In terms of future growth strategy on the sales front, if you could highlight more geography wise with respect to US and Europe, because Europe has been going at quite a good growth rate for all the players, if you could highlight some point over there?

Suresh Senapaty, Chief Financial Officer

Actually the reason why Europe has grown faster is that they’re growing out of a smaller base and they have a lot of catching up to do with especially North America. And given the fact that they’re in this kind of catch up mode and they have kind of renewed interest in offshoring, we expect European growth rates to remain at a higher rate.

Priya Rohira, Enam Securities

Also, if you could just highlight of the 40 client additions which have taken place, how much of them would be in the telecom and how much of it would be in the BSFI space?

Suresh Vaswani, President, TIS & Interops

Priya, 17 customers were in the technology space and BSFI has 4 customers.

Priya Rohira, Enam Securities

Okay, and could I have the employee deployment in the telecom practice, that’s the R&D part of your business rather?

Suresh Senapaty, Chief Financial Officer

It will be 13,500 plus.

Priya Rohira, Enam Securities

Okay thank you very much and wish you all the best.

Operator

Thank you very much mam. The next question comes from the line of Mr. Girish Pai with East India Securities.

Girish Pai, East India Securities

Hi, can you comment on the growth outlook for your R&D services and enterprise solutions, specifically will they be growing in line with the company or lower?

Ramesh Emani, President, Product Engineering Solutions

This is Ramesh Emani. In terms of the growth in these R&D services business, as we are not giving any specific divisions, specific growth numbers or guidance numbers, but what you can see from what we have done in the last one year is we have grown at about 33%, and in the technology business we have grown 40%, and we are definitely seeing that we will be able to maintain above-industry average growth even in this segment.

Girish Pai, East India Securities

For enterprise solutions?

Ramesh Emani, President, Product Engineering Solutions

For enterprise solutions I’ll have Sudip Banerjee to comment.

Sudip Banerjee, President, Enterprise Solutions

Enterprise consists of seven verticals. They include retail, manufacturing, energy utilities, and services, etc. Some of them are growing faster and some are not growing as fast, so the real faster growth that we have seen and we expect to continue is in verticals like healthcare, verticals like energy and utilities, and verticals like transportation, media, travel, etc. Those are the three areas that growth rates in the current years have been in line with the company average and in some cases much ahead of company average.

Girish Pai, East India Securities

I just want to come back to your acquisition strategy where you mentioned that you’re going to go for the string of pearls, but you also said that you’re not averse to making large acquisitions. Now, is there any particular criterion on margin that you’ll be putting on the large acquisitions?

Suresh Senapaty, Chief Financial Officer

The criteria would be single whether it is large of small, to be aggressive in terms of margin, to be aggressive in terms of the cash flows, to be aggressive in terms of energy helping us to take our growth rate higher.

Girish Pai, East India Securities

Do you see too many targets out there in the market with $200 million sizes which have margins similar to yours?

Suresh Senapaty, Chief Financial Officer

I don’t think one is looking at a company with targets similar to us, because then it will become more of an aggregation, but you would have to look as to whether by doing an acquisition you will be able to fix value to energy, that the margin irrespective of what at this current level is can be taken up to a level within a finite time, based on an identified action or front on which you execute and deliver.

Girish Pai, East India Securities

My next question is on your sales and account management investments. Now, could you tell us what are the number of sales people and account management people in your company?

Sudip Banerjee, President, Enterprise Solutions

Girish, we have 230 people in our sales team just now…

Suresh Senapaty, Chief Financial Officer

Going forward…we have been investing on our sales engine and we’ll continue to invest more and more on the sales engine like we said. Whatever operational improvements we achieve, we’ll have to reinvest in building solutions, in having more stronger front ends, more high quality consulting kind of front ends, and so on and so forth.

Girish Pai, East India Securities

My last question is on your innovation initiatives, can you just throw some light on it, what exactly you mean by that?

Dr. A. L. Rao, Chief Operating Officer

I’m A. L. Rao here. Under the innovation initiatives we have two broad activities -- one a centrally funded innovation team whereby fund projects that will create either point solutions for specific industry applications or intellectual property components for the product engineering solutions. The second initiative is what we call it as centers of excellence; these are more run in each vertical. They focus on competence building in the emerging domains as well as using that to leverage a service domain. So, across the COEs and the centrally funded investment projects, the overall target is to create either specific industry solutions or intellectual property components and use them to provide the solutions to specific customers. Last year, we achieved 5% of the revenues through the initiatives. And going forward, we have also kicked off what we call as quantum innovation where we would like to scale up the current activities to much higher returns. We are targeting in a three-year timeframe anywhere between 8-10% of the revenues to come from the newly initiated quantum initiatives…

Operator

Next in line we have Mr. Nitin Jain from Bank of America.

Nitin Jain, Bank of America

Congrats on your excellent result. Just looking at your financial services revenue in your IT services segment, the financial services revenue is contributing around 20-21%, are you in the process of developing any specific products for financial services, maybe Basel II, or are you in the process of hiring any company with a strong product domain specifically for the financial services side?

Girish S. Paranjpe, President, Finance Solutions

Hi, Girish Paranjpe here. We are not building any products, although we have done work in, let’s say, Basel II area with multiple clients. We don’t think it is right for us to build full-fledged products and become a product company of any sort. But having work experience and having done work in that particular area, it does give us a benefit and an edge while we are in a competitive situation.

Suresh Senapaty, Chief Financial Officer

Our strategy is to be product neutral.

Nitin Jain, Bank of America

Okay, thank you.

K. R. Laxminarayan, Investor Relations

Prathiba, can we have the last question?

Operator

Sure sir. The last question comes from the line of Mr. Shekhar Singh with ICICI Securities.

Shekhar Singh, ICICI Securities

Hi sir, just wanted to know what is the CapEx plan for FY 07?

Suresh Senapaty, Chief Financial Officer

We are not specifically sharing the CapEx for FY 07, but if you look at the kind of expenditures we did last year versus what we wanted to do this year, it’ll be significant upscaled because of some of the facilities that we’re building, some of the training facilities that we’re building, some of the centers that we’re building outside of India, whether it’s China or Bucharest, etc., or even in Japan and extensions, we’re increasing the capacity also in our London office and many other non-UK, European centers. From that perspective we are going to have a significant upscale in our investment in CapEx plus the acquisition also.

Shekhar Singh, ICICI Securities

Secondly, just wanted to know the proposed merger of Lucent and Alcatel, will it be having any impact on your operations?

Dr. A. L. Rao, Chief Operating Officer

As of today we have a large engagement with Alcatel. We are working with multiple product groups. I don’t expect as of now any significant impact in the short term, because they would obviously go through an intensive product strategy in discussions and we’ll have to wait for that, but I don’t think in the short term any impact will be there.

Suresh Senapaty, Chief Financial Officer

Also this kind of transaction creates opportunities, as we’ve explained, because when you have two companies merging and one you have made strong inroads and other you don’t enough, that’s an opportunity, and also the risk as to whether for any reason the kind of an opportunity we currently are dealing with gets reduced. But our objective is to be able to work on a priority basis to make sure that we are able to make an opportunity out of it. In many ways in the past we have succeeded and we will continue to keep a close watch and see what the kind of initiatives and steps we need to take to be able to optimize on that.

Shekhar Singh, ICICI Securities

Okay sir, thanks a lot.

Operator

Thanks you Mr. Shekhar. At this moment, I would like to hand over the floor back to the Wipro management for final remarks.

K. R. Laxminarayan, Investor Relations

Thank you, ladies and gentleman for participating in this call and taking your time out. We hope you found this call and our interaction useful. Should you have missed this call, an archive is available, both audio and in a short time we’ll have a transcript with us. And at any point of time if you need any clarifications, the IR cell would be delighted to talk to you. Thank you once again and look forward to talking to you again next quarter, and have a nice day.

Operator

Ladies and gentleman, thank you for choosing WebEx Conferencing Service. That concludes this conference call. Thank you for your participation. You may now disconnect your lines, thank you and have a nice day.

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