Wipro Limited (WIT) Q2 2015 Earnings Report, Transcript and Summary

Aravind Viswanathan - General Manager of Investor Relations and Corporate Treasurer T. K. Kurien - Chief Executive Officer, Executive Director, Member of Strategy Committee and Member of Administrative/Shareholders & Investor Grievance Committee Suresh C. Senapaty - Chief Financial Officer, Executive Director and Member of Administrative/Shareholders & Investor Grievance Committee Jatin Pravinchandra Dalal - Chief Financial Officer of The IT Business Gamma Kali Prasanna - Chief Executive of Global Infrastructure Services Sangita Singh - Chief Executive of Healthcare & Life Sciences

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division Pankaj Kapoor - Standard Chartered PLC, Research Division Sandeep Muthangi - IIFL Research Ankur Rudra - CLSA Limited, Research Division Sandeep Shah - CIMB Research Diviya Nagarajan - UBS Investment Bank, Research Division Nitin Mohta - Macquarie Research Pinku Pappan - Nomura Securities Co. Ltd., Research Division Ravi Menon - Centrum Broking Private Limited, Research Division Ankit Pande - Quant Broking Private Limited, Research Division Ashish Chopra - Motilal Oswal Securities Limited, Research Division Dipesh Mehta Sandip Agarwal - Edelweiss Securities Ltd., Research Division

Ladies and gentlemen, good day, and welcome to the Wipro Limited Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aravind Viswanathan. Thank you, and over to you, sir.

Yes, hi, thanks. Good evening, and good morning to all of you. Wish you all a very happy Diwali. A warm welcome to our quarterly earnings call. We will begin the call with business highlights and overview by T. K. Kurien, Executive Director and CEO; followed by the financial overview by our Executive Director and CFO, Suresh Senapaty. Post that, the operator will open the bridge for question and answers with all the management team. We have the senior management team of Wipro present here to answer your questions. Before Mr. Kurien starts, let me draw your attention to the fact that during this call, we may make certain forward-looking statements within the meaning of Private Securities Litigation Reform Act 1995. These statements are based on management's current expectations and are associated with the uncertainties and risks, which may cause the actual results to differ materially from those expected. The uncertainties and risk factors are being explained in our detailed filings with the SEC of U.S.A. Wipro does not undertake any obligations to update forward-looking statements to reflect events and circumstances after the date of filing thereof. The conference call will be archived, and transcript will be available on our website, wipro.com. Ladies and gentlemen, let me now hand it over to Mr. Kurien.

Good evening. Good morning to everyone in the call from across the world. Wish you all a very happy Diwali. Let me start with the results and then talk about the key areas of focus. We grew our IT Services revenue sequentially by 3% in constant currencies and in the midpoint of our guidance. While the technology landscape is undergoing change, we see multiple areas of opportunities based [indiscernible]. Overall, the demand environment continues to hold steady. In North America, we see discretionary spending better. In Continental Europe, we see opportunities of growth, given the lower levels of outsourcing benefits. We're also seeing temporary cutback in discretionary expenses from certain industry segments as they adjust to structural changes. We continue to see good deal momentum in large deals led by Infrastructure Services. We see strong traction in Energy & Utilities business, with 6.9% sequential growth; and the Healthcare & Life Sciences Business, with a 5.7% sequential growth. Among service lines, Global Infrastructure Services continues to -- continues the impressive growth -- sequential growth of 8.1%. On service lines, we see improved opportunities within our BPO and our Product Engineering business. We continue to push on operational excellence, the deploy service mix, our autonomic AI platform in over 20 customers in the last year to deliver increased productivity, creditability and quality in IT operations. This model aligns with our shift to fixed-price engagement. The share of fixed-price engagement increased 52.1% in quarter 1 to 53.1% in this quarter. Our customers clearly see value. Our latest customer satisfaction survey showed an increase in customer satis scores by 240 basis points year-over-year. In terms of our strategic spend, we see great potential in digital and open sources. We see these as critical themes for our customers in the development of these strategic technology road maps. We have launched an open source practice and intend to make significant investments in building advisory capability and the creation of intellectual property to gain industry leadership in this segment. Last quarter, we scored 8 major wins. A new business agenda includes rearchitecting value chain and reimagining business offerings to meet the more demanding customer needs. We are working with our clients to provide a fluid end-user experience, along with transforming the enterprise and operations, to increase self-service straight through processing and lower costs and the cycle times. As a strategic initiative should deepen technical skills, we have launched a distinguished number of technical staff programs to create a [indiscernible] of technical specialists who will work on developing intellectual property in next-generation technology. We have increased our total headcount this quarter by 6,845 associates. On the sustainability side, our efforts have been well recognized. We've been selected as a member of the Global Dow Jones Sustainability Index in 2014 for the fifth year in succession. Thank you for your time. Let me request Senapaty to talk about the financials in more detail.

Thanks, T.K. A very, very happy Diwali to all of you on the call, and good day, ladies and gentlemen. Before I talk on the financial results of the quarter, please note that, for the convenience of readers, our IFRS financial statements have been translated into dollars at the noon-buying rates in New York City on September 30, 2014 for cable transfers in Indian rupee as certified by the Federal Reserve Board of New York, which was $1 equal to INR 61.92. Accordingly, revenue of our IT Services segment, that was $1,771.5 million or in rupee terms, INR 109.2 billion, appears in our earnings release as $1,764 million based on convenience translation. Total revenue for the quarter were INR 116.8 billion, an increase of 8% year-on-year. Total net income for the quarter was INR 20.8 billion, an increase of 8% year-on-year. In IT Services, our revenue for the quarter was $1,771 million, a sequential growth of 1.8% on a reported basis. And in constant currency, IT Services revenue grew 3%. IT Services margin declined 85 basis points on a quarter-on-quarter basis, largely due to increase in compensation costs and other employee costs, which was partly offset by profits from sale of a strategic investment, operational improvements and ForEx. Let me remind you that we gave our merit increases effective 1st of June to our employees. And in quarter 2, there is an incremental impact of 2 months of wages. Our IT Products segment delivered a revenue of INR 9.2 billion for the quarter ended 30 September. 2014. On the currency front, our realized rate for the quarter 2 was INR 61.66 versus a rate of INR 60.39 realized for the quarter 1 of FY '15. As of period end, we had about $2.15 billion of foreign derivative contracts of signing hedges. The effective tax rate for quarter 2 was 22.8% as against 21.9% in the quarter 1. The increase was on the account of an increase in mix of revenue from foreign subsidiaries. For the quarter, we generated operating cash flow of INR 13.8 billion, which was 66% of our net income. We generated free cash flow of INR 11.5 billion, which was 55% of net income. At this point, we will be open for questions. Operator?

[Operator Instructions] The first question is from Edward Caso of Wells Fargo.

It's Rick Eskelsen on for Ed. The first question I had is, T.K., in your opening remarks, you talked about, I believe, discretionary cutbacks in certain verticals. Just wondering if you could add some color on what you're talking about there and then maybe a broader comment on what you're seeing in discretionary.

So a couple of areas that we're seeing discretionary spending clearly coming back is, especially, if I look at it from a geographic perspective, I would say the U.S. has been a bright spot. We haven't seen discretionary expenses coming back in a large way in Europe. We've seen a little bit of an uptick, both in Middle East as well as in Asia Pacific, which includes India. So it's been a little bit of a mixed bag, strong uptick in the U.S., average to about normal uptick in Asia Pacific and Middle East and almost no uptick in Europe. If you look at industries, we've seen clearly, on the banking and financial services -- banking side, especially, we have seen digital -- especially digital front end, the changes that are happening out there really kind of driving a fair amount of discretionary spend. We're seeing, in the retail industry, especially with more -- the newer payments coming in some level of discretionary spending there, and online continues to kind of grow. In one particular industry, I mean, we are finding a little bit of a headwind, especially around our commodity businesses that are commodity-based. Because as we have seen commodity prices go down, people are really reallocating their capital budgets out of discretionary programs more and trying to see what they can do to kind of cut back on the year end until commodity prices kind of recover. That's been one area where we had a little bit of softness. That's broadly what we see.

That's helpful. Then the next question, just some of the top client -- the top 5 client metrics were a little bit weak. And I know you had previously talked about seeing some follow-on work being delayed with some of your largest clients. I'm wondering if you're still seeing that. And if so, why? And what you expect there.

So that goes back to the earlier comments that I have raised, which are specific to the industries. I think anything to do with natural resources is an industry, where we've been having a little bit of a headwind in terms of discretionary spending coming back. With the current oil price and the metals prices being at historical lows, we expect that, that weakness is going to continue at least for this quarter and probably for the first half of the next quarter. After that, we expect that it will probably stabilize.

Then just a final question. On the ATCO, I'm wondering if you could size the combination -- or the contribution this quarter and what you're expecting for next quarter as well.

So on the next quarter, it will be very, very minimal in terms of the contribution on this quarter. Jatin, do you think...

So we have not broken that out, Rick. As T.K. mentioned, for current quarter, which is quarter 3, we do not expect a material additional incremental revenue coming out of ATCO.

Our next question is from Joseph Foresi of Janney Montgomery.

I was wondering, first, if we can just talk a little bit about the infrastructure business. It appears that you've had solid growth in that business and it continues. Are those market share gains? And how would you characterize that industry at this point?

So let me hand it over to G.K. Prasanna, who runs our infrastructure business, and he you can give you a sense of what's happening in terms of market dynamics and where we're seeing uptick in that particular segment.

This continues to be a very big opportunity in general and a big opportunity for Wipro. In particular, we are the leaders in this space, and we continue to invest deeply. Both in terms of our position and also in terms of our market coverage, we've made the improvements and that is showing [indiscernible] at this point in time. We can expect that we'll continue to win large deals in this space.

Okay. And then the health care vertical performed fairly well. We've seen some lumpiness from some competitors. Maybe you could just talk a little bit about where you're doing work in health care and what drove the growth this quarter.

Sangita, can you answer that question?

Good evening, and good morning, wherever you are. Sorry, it's the Diwali weekend and there's a lot of noise in the background. I'll try and be as clear and loud as possible. So we've seen a sequential growth momentum for the last 5 quarters, and this is really an execution of the focus areas that we had called out at the Wipro level, and we've been driving it programmatically. The 3 things are increasing the share in our large accounts by balancing demand capture with demand creation around new areas like digital, as called out by T.K. earlier, focused pursuit of new logos in the health care, life sciences and medical devices and being able to create differentiation for Wipro through our domain offering around patient centricity and compliance. Patient engagement and drug adherence is an important part of Life Sciences clients, and they're leveraging our digital technologies and platforms that we have built for making this. All of this has really led to the healthy growth that we have seen across our key accounts and some of the large deals that we won in the new logo pursuit.

All right, okay. And then the last one for me. The headcount moved up, obviously, this quarter and probably the first time in a couple of quarters where we've seen that kind of growth. I guess what I was wondering is, is this ahead of the project ramp that you expect from your large client win -- or your recent large client win? And is any percentage of that rebadging of employees?

I get the rebadging question, but doesnt allow to answer. But overall, what we do is that we've been fairly cautious about hiring if we don't see demand. So if you look at 2 things that are going out of balance, 1 is that you will see that the -- our infrastructure -- our overall utilization has actually gone up last quarter, and hiring, too, has gone up last quarter. To that extent, it's really based upon the confidence that we have in terms of demand. That's really the background behind this. I'll hand over to Jatin Dalal, our CFO, to talk about the rebadging numbers. I don't have the rebadging numbers with me.

Yes. So Joe, we have added 550 people on account of ATCO that we completed in the current quarter, of the total addition of 6,845. And beyond that, there is no unusual addition on account of rebadging. The rebadging is part of our business, but a very small component overall, which continues as usual.

Our next question is from Pankaj Kapoor of Standard Chartered.

First, just a small clarification. The revenue number that we have put out in the data sheet, which is excluding the Infocrossing, BPO and India and Middle East business. That number seems to be flat on a quarter-on-quarter basis. So it looks like most of the incremental revenue got booked outside. So is it the right assumption that the ATCO revenues would have gone in that heading, which is basically Infocrossing, BPO, et cetera?

Jatin knows a little bit of your question. But...

Yes. So this ATCO is outside the bucket of the numbers that you see, which is revenue mix on-site and offshore in dollar terms.

Okay. So essentially, that would give some sense in terms of what could have been the contribution of ATCO to the overall revenue number?

Yes, but it would also have the overall growth numbers in Infocrossing, BPO, et cetera, which you can -- I mean, so that's one bucket, which is outside this one.

Okay. And given -- I mean, you don't expect this bucket to change materially on a quarter-on-quarter basis in the next quarter? So this 2% to 4% growth guidance that you have given is on overall bucket?

Yes. 2% to 4% growth guidance that has been given is on overall bucket, of which, we believe, the incremental revenue on account of ATCO would not be a material number.

Fair enough. And then a question just on hiring. Like, I mean, of course, we have done a very strong hiring, even organically in this quarter. Any sense in terms of how much of this would have been, like, anticipatory and how much of this would be essentially made up of freshers, which is basically a planned kind of a hiring? If you can give some color on that.

So I'll ask Suresh. Go ahead.

So on a hiring sense, we had a planned hiring, both from campuses as well as the -- for specific business needs and actual experienced hiring. I think, it's been a 50/50 kind of hiring between special and experienced people.

Okay. And does it materially changes our view on utilization, which we continue doing, very high. So you think that, that, obviously, could come under some pressure in the near term. But excluding trainees, do you expect the utilization of select headroom to grow?

Pretty clearly. We see -- so if you see our utilization over the last 4 quarters have been -- we have been growing. And we see headroom 4% has gone up in the last 2 quarters, and we clearly [indiscernible] as we move forward.

Okay. And my final question is on the outlook that we are projecting for the rest of the year. We are talking about the growth momentum picking up in the second half, which appears that the fourth quarter exit could be potentially better than 3Q. Is that a right assumption? Is that what we are basing it on? And I mean, what are we really basing it on in terms of the developments? Or you have a pick-up in the clients that you spoke of that is what is driving this confidence?

Yes. So Pankaj, we have spoken about the fact that we see continued momentum in the business. We have given our quarter 3 guidance, and we are -- our endeavor is that second half is better than first half. And we have -- I mean, that's the ambition now. I'm not trying to extrapolate a quarter 4 number from there and therefore, guide a full year number to that. What we have stated, where we see the market and our performance, and that's the statement that we will make.

Okay. And just the last one on deal wins. Any sense in terms of TCVs, excluding the ATCO deal that we had last quarter? Any sense in terms of how the TCV would have moved? If you can share the absolute number. If you can't, if you can give some trajectory.

Yes. So directionally, we have done better in terms of the order booking, but we don't -- as you know, that we don't have share this number.

We'll take our next question from Sandeep Muthangi of IIFL.

Happy Diwali to the management. I have a question. I have a slightly broader question. In fact, if you look this year, there has been an improvement in the deal section, in the deal announcement, et cetera. But surprisingly, it's not yet showing in the revenue growth. I want to ask T.K. whether there is a bit of an expectation mismatch between what we are expecting in terms of revenue growth accelerating and what will actually happen. Or is there any leakage in the business, which is somehow offsetting the improvement in deal traction that has happened?

So I think what's happened in the past 2 quarters for us is that there are certain specific industries. And I talked about that very specifically in terms of commodity base industries, which have affected us this particular year, especially in the first half of the year. This was a business that is growing very well for us in the past couple of years. And like every business, it will go through a cycle of growth and then adapt and then a hit when commodity prices come down. And that has, to some extent, affected us for the past couple of quarters. Now the good thing is that we are not losing market share in those accounts. That we are pretty sure about. If there is a decline in spend, I think it's our job to stay with the customer as the decline in spend and stay true to cycle. Because when it comes up, we think that we would be the beneficiaries of that. And that's exactly what we continue to do. So from my perspective, while there have been deal wins and there have been announcements that have come up, I think some sectors have hit us negatively in the first half of the year. We expect that to continue for another quarter or maybe another quarter and a half, then we expect that, again, to recover. So this is not a secular trend that is particularly worrying for me. This is something that is there, one that we live with, live through, and then life comes back to normal.

Right. I have one more question on the ADM business. This has been showing a decline pretty sharp over the past 2 quarters. It's down almost 12%. The similar is not true for the industry. It's been weak, but not this weak. I want to see whether there is anything particular with the way Wipro is classifying the ADM side, which is resulting in the decline because at least the discretionary part, the digital part, based on your commentary, should be showing some pick-up over here.

So there are a couple of things. The -- which I think is important for us to kind of -- it's also partly the way we kind of represent the numbers, and it's also partly our business. I wish you could see this. I wish I could say this, one or the other [indiscernible]. So if you look at our business, a majority of the decline that's come in last quarter has really come in from our Telecom business. If you look at our Telecom business, our Telecom business has clearly the -- when I say Telecom, again, I just want to be clear about it. This is our network business that we have with network clients, where we maintain switches. As that business comes down, you would expect to see decline in that particular segment. And that line that is called ADM will decline. The second area where we've seen some decline is, again, like I said, in 2 areas. In the commodity business, we've seen large mainframe businesses kind of cooling off, but that, we expect, to be short term and then come back. Of the [indiscernible] classification, frankly, from our perspective, we couldn't do a classification change midstream, but we will do a classification change on the 1st of April because that's logically bad to do it. And we'll take out components of TAS business and classify ADM along with that, and then it might present a different picture.

Our next question is from Ankur Rudra of CLSA.

The first question, if you can help me understand this. Clearly, in the last 3 years, you, of course, focused significantly on improving account mining, and you've seen a lot of success in your top 10 customers, which is quite good. I just wanted to know your thoughts on where we are on that journey and the recent softness you've seen in your top customer, top 5 and top 10, this quarter. How much of that is a trend?

Well, here, from a [indiscernible], the way we look at it is are we losing share in particular customers, the share actually coming down? And in our top 10 customers, right now, we're not seeing that. So that stands. The way we see it is that we don't expect this to be a secular trend. We expect it to come back. And when it does, I'm sure you will see it reflected in our results.

So T.K., yes. I just want to request those -- for people to put their cellphones off. Thank you. Go ahead, sorry.

Yes. Just wanted -- my follow-up question to that was what proportion of the top 10 customers are exposed to the commodity trends that you mentioned in terms of where you're seeing cyclicality?

Jatin, do you want to answer?

Yes. So we can get into [indiscernible] based on that, Ankur. I think it is -- we are not quantifying how many customers in which segment, et cetera. We have shared that is the challenge that we are facing, and we are reasonably confident that, that would start coming back in -- early in next calendar. And I think that's the commentary that we'd like to make.

And the guidance on the quarter is despite that.

Fair enough. Just one question if I can put through on margins fairly quickly. We've seen some softness this quarter. Maybe you can help us with sort of a set of margin which is in terms of what was happening, given the improvement in utilization on the offshore shift. And just related to that, we're seeing a huge spate of infrastructure deals that you have won recently, which will probably ramp up in the following few quarters. Should we expect this softness to continue?

Yes. So Ankur -- I mean, we'll go back to what we always reiterated, and that is that the growth is for strategy for the organization. And we will maintain that the margins would remain in form of a little bit up, a little bit down quarter-on-quarter basis. And in medium term, we feel that the margin can be certainly taken up, and we'll have positive adds. Now specifically on this quarter, we had 2 months' impact of MSI. So the entire margin buildup is related to the manpower cost, which has flown through the margin lines. And for future, I will sort of reiterate what I began with, that we will remain focused on the growth and getting the growth back. And we will invest where we need to get the trajectory up.

Our next question is from Sandeep Shah of CIMB.

Just the follow-up in terms of the margins, Jatin. We do agree that the wage inflation is sweeping the margins in this quarter. But if you look at the tailwind, I think, on a realized rupee dollar, there's a 2% depreciation. At the same time, there is a cross-currency headwind. There is an offshore shift, which has happened as the utilization increased, which has happened. There is a fixed-price improvement, which has happened. So what has led to this tailwind not reflected into the margin? So what are the headwinds other than the wage inflation in this quarter?

Yes. So Sandeep, as you rightly mentioned, if you see operating parameters, we are remaining as focused as ever on driving the right efficiency and right competitiveness out of our operating parameters. Having said that, this quarter, specifically, we had the increase in the manpower costs, which has flown through margins. And in terms of ForEx, there is always a little bit plus or minus. But in cellphones, we look at it in overall margin number, and that margin delta is still dominantly manpower cost-related. So that's my comment. But as you rightly pointed out, we are focused on getting the best out of our operating parameters. And that will continue in coming quarters, too.

Okay, okay. Is it -- like, last year, if you look at the S2, the margin uptick was better, with no major change in the currency over H1, with the wage inflation being behind. Whether some amount of that trend can be repeated this year, assuming the rupee remains at more or less similar levels?

So Sandeep, as you are aware, we don't guide on margins. And we have given our guidance on revenue. And as I had mentioned in my earlier question, I think we will remain focused on getting the growth trajectory to where we think we should be. And therefore, one would invest where one needs to in terms of ramping up resources or investing in S&M. And therefore, I would not like to comment as to where the trajectory would be. We would -- it would be transitory up or down, with the medium-term focus of taking it up.

Okay, okay. And a good amount of recruitment, is it fair to read that as subcontracting cost, which has been going up in this quarter, may remain at this level? Or -- because the recruitment has been one of the highest.

Yes. So subcontracting cost is a factor of the deals that we pick up and the portfolio of services that we bid. Sometimes, some of the niche services which we need only for a few months, we prefer to hire on subcontracting basis rather than investing and hiring the resources on rules. So I wouldn't see -- I wouldn't guide on the number that it will come down or go up. But I think you should measure us on overall growth and overall margin that we deliver.

Okay, okay. And just the last question in terms of bookkeeping is, one of the media reports were saying that utility client base out of North America where Wipro was one of the vendor, there was overrun in terms of executing the projects. So any implication in terms of the relation that could be one of the new client-specific issue to come in the future quarters?

No implication as far as the customer is concerned. No implication in terms of the business of the customer is concerned. In fact, it's interesting. If you read the audit report in detail, and we can have our Investor Relations send you a copy of the audit report, you would get a sense of what the issue is actually all about. I think it's an issue, which has been blown way out of proportion. As far as they are concerned, it has nothing to do with the customer as the customer that used to be a valued customer of ours. And the customer could grow in terms of size going forward.

Our next question is from Diviya Nagarajan of UBS.

My question is related to how you look at utilization rates and employee hiring for the company. Compared to some of your peers who are trending mid- to high 80s on a utilization basis, you still have some headroom for growth. So what was the necessity to kind of add headcount very aggressively? Is there some skills mismatch that you're trying to address? Or could you kind of throw some light on this, please? And also, give us some color on the kind of utilization levels that you're comfortable with as peak utilization rates?

[indiscernible] going to answer the question.

Diviya, if you look at the overall supply chain -- and let me start. If you look at utilization first, utilization, as you see for the last 4 quarters, has been going up. And even in this quarter, it has gone up. So very clearly, we see that there is head space for us improve further. So again, on the hiring part, if you see, yes, I mean, [indiscernible] jobs which we will continue to hire lateral and experienced people. And we'll continue to hire from campuses. We will go on campus visits. So that mix will continue through a combination of freshers and experienced people. [indiscernible] both on-site and offshore. And third is the attrition fees on the supply chain, which is also stable. It has come down from the previous quarter. If you'd see, all put together, that's the way we will look at the entire supply chain moving forward.

Our next question is from Nitin Mohta of Macquarie.

So I had 2 questions. First was on the third quarter outlook. A 2% to 4% sequential growth seems quite impressive, given minimal contributions [indiscernible] your comments about the energy and resources lines. Now this seems a little odd to the muted October-December quarter expectations from some of your peers. So a, I just wanted to understand, what's driving your optimism? And b, what are the risks that can prevent you to hit the higher end of guidance?

One is that when we give -- when we give guidance, guidance is in the range, right? So that's the basis of guidance. So I don't think the top end or the bottom end, we just want to give guidance in the range. Second is in terms of optimism, frankly, if you don't have this level of optimism, if you have bigger optimism, it's as simple as that. So we are, right now, at the execution phase. And as we execute, we believe that the revenue will [indiscernible] again.

All right. The second question was, Sangita, during the quarter, we saw a major M&A deal in the health care vertical. Just curious to understand how does that change the competitive landscape.

Sangita, [indiscernible] care to answer that?

Sorry? T.K., what did you mention?

Just if you can answer the question, that will be terrific.

Yes. So yes, we did see a large acquisition that happened, but there's a large market in the IT Services, in health care as well as in life sciences. We've been growing well in the last several quarters, and we would not like to comment on other companies.

Sure. [indiscernible] understanding, it doesn't really alter the way you were purchasing deals. Or there hasn't been any change in terms of your competitiveness to go out and win deals in the space?

Absolutely not. We had called out earlier our focus on Medicare and the health market that continues to grow. We'll be leveraging the platform that we have to drive growth in that business. The health care reform mandates are leading to mitigate expansion, and we are confident of going in that space as well.

Our next question is from Pinku Pappan of Nomura.

I Just want to understand your demand outlook in Financial Services. 2 quarters back, you were showing a good momentum. But I think the last 2 quarters, the momentum seem to kind of weakened. So also, in your prepared remarks, you also mentioned that you're seeing good opportunities in digital and in banking. So just put together all this, I just wanted to understand, how do you see the growth outlook in the coming quarters there?

So quarter 3, we expect it to be muted as far as Banking and Financial Services is concerned. We expect Banking and Financial Services to come back in quarter 1 of the calendar year next year.

Sorry. And what is leading to the weakness in Q3?

There would be no particular reason, except that beginning of last quarter in the analyst call, we were very specific about [indiscernible]. We are going to have weakness, which is going to be based, number one, on client specification; and number two, the entire portfolio. If you look at it [indiscernible] Banking and Financial Services. Those are the 2, we feel, why we are having this perceived slowdown in Banking. We expect that to come back again in quarter 1.

Okay, that is helpful. Second, I wanted to understand the margins. What are the quantum wage hike has given? Exactly, could you quantify the margin impact due to wage hikes this quarter and what you expect in terms of impact in the next quarter?

Well, as you are aware, we had given the wage hikes, and we talked about the percentages in quarter 1. That goes effective 1st June and only 1 month, increased salary impact had come in quarter 1. This quarter, which is quarter 2, we had 2 months impact. And total manpower-related costs impact on the operating margin has been the dominant -- predominant delta between quarter 1 margin and quarter 2 margin. We don't expect any additional impact in quarter 3 because the full impact has now come through in quarter 2.

Okay. And lastly, there is a good degree of offshore shift this quarter. Was it planned? Or was there something -- is it something else that caused the shift?

I hate to tell you that it's accidental. It isn't.

Our next question is from Ravi Menon of Centrum Broking.

I have a couple of questions here. One is just a bookkeeping thing. If you could provide the gross margin and the sales and marketing and G&A for IT Services.

Yes, just give us a second. I'll give it to you.

And then secondly, I'll go ahead with the second question meanwhile. As a follow-up, utilization has gone up 130 basis points Q-on-Q. Headcount is also up 4.6%. So how do I expect that realization to have shown a margin lump given if I had 50 people added on-site from ATCO? But given your revenue growth in CC terms, actually, it should have come in at least at 4.6% if pricing hadn't declined -- realization hadn't declined. So should we interpret this as some kind of pricing pressure? Or this is a change in the mix?

Jatin, can you answer that?

Can you come back on the question directly? Sorry, I didn't follow it.

So with headcount up 4.6% Q-on-Q and utilization also up, I thought that with -- realization should have shown a margin uptick, given the ATCO deal. So why is, in CC terms, revenue growth not at least in line with headcount growth if realization is stable?

Yes, because -- yes. So the key data value that -- the headcount addition is not entirely -- the build headcount addition, as you can imagine, a quantum of that. Also, it is the pressure we're having, which goes through the training program. So one cannot correlate the headcount -- net headcount addition with the order revenue growth.

That is correct. But, I mean, your utilization is also up, right, all of the time. So then shouldn't we look at the net headcount addition and the utilization -- gross utilization, excluding trainees? Or even if you're taking -- including trainees, your headcount is up -- your utilization is up.

Not sure. But what I would mention, Ravi, is that a lot of this, in terms of the volume growth, what you are indirectly referring to, and the price uptick that's determined by the timing when we make people deliver. For several quarters now, we have not broken out the volume growth and rate increases, so I would unable to comment on that. But I can also -- and one additional factor is that the revenue is also impacted by the growth in [indiscernible] for equities, the India business and BPO business, where the volume -- the addition of people and utilization are very differently run. So therefore, I would say that the question that you are asking sort of indirectly, I would sort of give an answer to that. It is that we are happy with the overall uptick that we are seeing in the revenue. And I am unable to break it down between the volume and the rate because we have not shared that for several quarters, and we don't break it up anymore.

All right. And I'll just wait for the clarification on the GM.

Yes. So the Investor Relations team will send you out the [indiscernible] and the percentages for IT Services.

Our next question is from Ankit Pande of Quant Capital.

My question would be around whether we are seeing any challenges in retail sector. I think we have highlighted that and that will mean -- continuing, I would like your comments on that. And also, in what areas exactly has discretionary for you improved? You did mention that, basically, in all geographies except Europe, you do see some uptick. So what areas have the -- have you seen some uptick?

Well, basically, what we've seen, Ankit, is that if you look across the board, anything to do with the front end of the customer, generally around simplification and digital and the digital deployment, there's 2 areas, where we're seeing discretionary spending coming back. As far as retail is concerned, retail continues to be challenged for us overall as a business. But if you look at our consumer products sector, we're doing fairly well. And that's the area of opportunity. So overall, if you look at the entire segment that we call RCPG, our own sense is that we would -- I think we would show moderate growth this particular quarter.

And if you could clarify RCPG, what exactly -- or roughly what percentage of that would be retail?

We don't break it out, but let me put it this way. The majority of the business that we have is the retail. But we are seeing -- our consumer products business is growing significantly, and we're also seeing our transportation business growing significantly.

Okay. And just to follow-up on that. I mean, in your discussion with especially some of the large retail clients and customers in the U.S., do you see improving budgets allocation next year? Or is that not quite on the table yet?

I think everybody is waiting for the holiday season to finish before they decide on what they want to do with the budgets for next year.

Okay. And you -- just one more question. You did highlight that you won 3 digital deals last quarter. Any number would you like to share with us this quarter?

Well, I wish I could anticipate what deals customers are going to give me this quarter. So when they give me deals, I can...

No. I meant, in Q1, you highlighted that you won 3. So in this part, I mean, Q2, the quarter that had gone by.

Is it a specific question in terms of what deals we won in quarter 2?

How many deals in digital?

Digital, yes.

Oh, it's digital. I think in digital, today, what we have done is we have changed our business a little bit. Now we are kind of currently focused on doing end-to-end work for 2 very large -- sorry, 3 very large customers, where we are doing everything from managing the customer interaction back into the way they can fulfill and the entire supply chain. So it's a fairly large -- they were 3 large particular space, where we're doing end-to-end, which is very, very specific to industry. So our view is that, ultimately, we build confidence and credibility in specific industries. Our view is that we can replicate that across, and that's really what we're after.

Okay. And these deals, are they related to the U.S. directly?

It's U.S. and Europe.

Our next question is from Ashish Chopra of Motilal Oswal Securities.

Just one clarification on the margins from my end. In the press release, you mentioned that the IT Services margins included a profit on sale of strategic investment during the quarter. So if you could just clarify, what was that about? And what was the exact quantum of the impact?

Jatin will answer that.

Yes. So as we are publishing our financial, the benefit on sale of strategic investment was approximately INR 61 crores, which is part of the overall margin that we have disclosed, Ashish.

So roughly about 0.5% [indiscernible] margin that we have shown there [indiscernible].

We'll take our next question from Dipesh Mehta of SBICAP Securities.

Yes, I have a couple of questions. First is I just want to understand about data set of our reporting. When we mention IT Services revenue, excluding Infocrossing, BPO, India and Middle East, so what IT Services revenue all includes kind of if you can help us understand that part?

So let me answer the question. I'll send the question over to Jatin Dalal, our CFO.

Yes. So effectively, this includes the core IT Services business, which is -- which exclude the Infocrossing, which is our data center business. It exclude BPO and includes the India and Middle East business. It also excludes the recent acquisitions or large deals typically. And therefore, this time, it does not include the ATCO revenue.

So does that mean next quarter onwards, ATCO would be part of IT Services revenue?

Yes.

Yes, it would be.

Okay. So IT Services revenue from next quarter onwards includes ATCO. So only these 3, what we mentioned, Infocrossing, BPO and India and Middle East would not be part of IT revenue continuous business?

Definitely.

So any specific reason for excluding ATCO for this quarter?

No, because -- no. Typically, what we have done in the past is wherever there is an M&A or acquisition, which has happened during the course of the quarter, are -- and this deal, while it was a very large, to us, deal, it got consummated during the quarter and therefore, it is not part of it. It will get included from quarter 3, and this is what we have followed in the past year.

Because when you talk about the matrices that we are used in our business, we take some time for any kind of a larger deal when that takes place, along with the delivery centers and so on that comes in. It takes a little time to be able to implement the templates of the flow there, which we are expecting to be done. And therefore, this quarter onwards, it'll be captured.

So just to focus on that IT Services, what we reported for the last 3 quarters, revenue remained largely flattish, $4 million incremental every quarter. So -- and if we -- your commentary and otherwise, I think we are suggesting uptick in our revenues, CM and other things. So -- and we won some of the large deals as well. So can you help us explain why we are missing that revenue uptick at least in this portion rather than the company as a whole?

Yes. So I would suggest that you look at overall IT Services revenue because we guide on that number, we get measured on that number and you all view us on that number. I would not like to comment. This data point has been given more from a facilitation standpoint for understand the -- to understand the rhythm of the matrix -- matrices, which are similar or in similar spirit, such as utilization and the movement of some of the parameters, which are very specific to IT Services business. The...

More in track of the internal measurement matrices. And therefore, you will see consistency in quarter-after-quarter on this piece of the business, and that is the reason. But from a growth perspective, when you go into the market, it can come in, in any of those pockets.

Okay, okay. And just to...

[indiscernible]

Yes. Understood, understood. And last question is about cash generation. I think this quarter, it appears to be weaker. So how do you see cash generation -- or business growth transferred into cash generation?

Yes. So Dipesh, if you see, for first half, our free cash flow to net income and operating cash flow to net income, they're respectively at 85% and 72%. And if you see the same numbers for FY '14, they were 87% and 77%. So effectively, for first half, there is -- the numbers are very similar to what they have been last year. Yes, we, indeed, had a little lower conversion of cash in quarter 2, but I don't see it as a change in any business at the moment.

Our next question is from Omkar Hadkar of Edelweiss.

This is Sandip from Edelweiss. T.K., I have just one small question. Most of the questions, you have answered very patiently, and my answers have likely been answered. Just how do you see this year now the situation versus what you were seeing last year as for the industry as a whole and for Wipro also? Because I'm seeing more and more sense of optimism, but it is not playing into numbers of any of the players in that significant way. So my question is whether really the demand environment has significantly picked up versus last year same period. Or it is still not certain?

So here is what's happening, Sandip. So I can just give you a sense of what we see. If you look at the large global players who are there and if you read their commentary, especially the commentary that's come out over the past week, I think everybody is converging on a point that, typically, in the services that we've traditionally offered in the past, there is price competition out there. It might not necessarily result in lower ticket prices. But clearly, the need for driving a different model for a high degree of efficiency is clearly there. And to that extent, I think we are finding deals being far more competitive than we've seen in the past couple of years. So that's one reality that all of us have kind of faced up to. Number two is that if you look at the deals that we have, I think the deal pipeline looks pretty strong. Our [indiscernible] ratios have been fairly decent. I think what we're seeing right now is in some of the existing accounts that we've had, we've had some headwinds, which are primarily sector-driven, which have affected performance over the past 2 quarters, and we expect to see that coming back. So overall, if I look at the last year same time in terms of absolute growth, the growth this -- for the first 2 quarters is clearly getting better. And from my own perspective, I see quarter 3 -- as we've guided for quarter 3, so that [indiscernible] quarter 3 kind of indicate our optimism of where we are. And overall, if I look at it, until now, I would say, clearly, we are doing better than what we were last year. That, in a sense, is [indiscernible]. It's a pretty long-winded answer to a short question, but it serves the purpose for you to get the context.

Our next question is from Hitain Sampa [ph] of Quest Investment.

Happy Diwali. Just a small question. I joined in a little late, but I just wanted to check. During this quarter, we have been talking that, over the next 3 years, we are expecting to reduce our headcount. Can you just give us a brief about what you are looking at?

[indiscernible], our goal is -- can you answer that question? Is it okay by you?

So we have been talking about 2 things. Let me explain this. One is we have been speaking that we will -- on automation, productivity, IP platforms, and that continues to be our focus. Apart from that, as I've explained earlier in the call, our overall -- entire supply chain, and we will continue to hire people, both from campuses and experienced people, where there is shortage based on demand. So both will grow entirely. Given that in mind, given that volume growth and the demand expected, we are getting losses, and hence, hiring happened this quarter, which will carry for us in the future quarters. So both our -- and I think it is -- our focus is going to be on both sides.

So I just wanted to get a sense about the figure of 30% reduction in workforce over the next 3 years. Will it happen? And how will it happen?

So I think we are getting a little too specific in terms of workforce reduction. I don't think that's the focus. The focus right now is to grow the business, right? Workforce reduction is not something that we are focused on. We are right now focused on seeing how we can grow top line profitably.

And also, the point of workforce reduction is basically for the same kind of work [indiscernible] people. But as we grow our business, we get more business and new kinds of businesses. And therefore, necessarily, the headcount will be going up. So it is for the same team over a period of time. Because of varieties of productivity tools and automation, et cetera, you can think of headcount dropping. But as the business grows, it will go up.

Ladies and gentlemen, that was the last question. I now hand the floor back to Mr. Aravind Viswanathan for closing comments.

Yes. Ladies and gentlemen, thanks for joining the call. If you have any questions that we could not take due to time constraints, please feel free to write to us, and we will be happy to answer them. Thank you, and have a good day. Happy Diwali.

Thank you, members of the management. Ladies and gentlemen, on behalf of Wipro Ltd., that concludes this conference. Thank you for joining us, and you may now disconnect your lines.