Wipro - Earnings Call - Q2 19/20

Transcript

Operator (participant)

Ladies and gentlemen, good day and welcome to the Wipro Limited Q2 FY 2020 Quarterly Investor Conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Aparna Iyer, Vice President and Corporate Treasurer. Thank you, and over to you.

Aparna Iyer (VP and Corporate Treasurer)

Thank you, Stanford. Warm welcome to our Q2 earnings call. We will begin the call with business highlights and overview by Abid, our Chief Executive Officer and Managing Director, followed by a financial overview by our CFO, Jatin Dalal. Afterwards, the operator will open the bridge for Q&A with our management team. Before Abid starts, let me draw your attention to the fact that during this call, we may make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are associated with uncertainties and risks, which may cause the actual results to differ materially from those expected. The uncertainties and risk factors are explained in our detailed filings with SEC. Wipro does not undertake any obligation to update the forward-looking statements to reflect events and circumstances after the date of filing.

The conference call will be archived, and a transcript will be made available on our website. Over to you, Abid.

Abid Neemuchwala (CEO)

Thank you, Aparna. Good evening and good morning, ladies and gentlemen. I'm joined here by my leadership team, and it is a pleasure for us to speak to you. Let me quickly provide you an update on the Q2 performance, our view of the demand environment, and the progress on our strategy. We had a good in-quarter execution on both revenue and margins, considering the slow start that we had this fiscal year. Our revenues grew by 1.1% in constant currency terms at the midpoint of our guidance range. For H1, our growth was 4.8% year-on-year in constant currency. On the demand environment, in BFSI, we have a strong set of offerings and a robust pipeline of digital deals. The growth, however, has decelerated due to the softness in spend by banking and capital market clients and the completion of large digital transformation projects.

In line with our expectations, our Consumer business grew well at over 6% year-on-year on the back of good deal wins. Energy and Utilities segment grew 6.3% year-on-year in constant currency. The global business in communication grew at double-digit year-on-year, while the India piece of communications remained volatile, impacting the overall growth of the Communications segment. We see early signs of recovery in both manufacturing and health. We see an uptick in the demand for health outside of HPS, our subsidiary that services our ACA clients, and we've had some good wins in the digital space in the healthcare clients. The demand environment remains unchanged from what I had shared last quarter, though there continues to be an overhang of macro uncertainty in certain sectors. Our U.S. growth has been pretty strong, while Europe continues to be weak.

We continue to see a robust pipeline, and the momentum of order book in Q2 has been better than Q1. And some of the deals that we had mentioned were delayed. Signing in Q1 has been signed in Q2. The restructuring of our India and Middle East business is going very well, and it is reflected in some of the deals that we have announced, like the large deal with ICICI Bank. We have delivered operating margins of 18.1% in Q2, which is comparable to 18.4% in Q1 after absorbing the incremental impact of wage hike for two months and investing in bench for growth. Our margins year-on-year have remained in a narrow band, adjusting for the one-time impact of the customer settlement in Q2.

Earlier this year, we sharpened our strategy into four pillars of Business Transformation, Modernization, Connected Intelligence, and Trust, which is enabled by talent engineering, IPs and platform, and open innovation. In order to deliver on customer needs across these four areas of our strategy, we have been investing on building capabilities in digital cloud engineering and cybersecurity and risk services. I'll give you some updates on each one of these four big bets. Our global investments in digital have created the requisite presence, experience, and scale to support transformation, not just in our core markets where it started, but also in the emerging markets. We are winning integrated transformational deals in Canada, Australia, APAC, and of course, we continue to win deals in the U.S. and U.K. In digital, our revenue grew 7% quarter-on-quarter, and now digital contributes just under 40% of the company's revenues.

For example, in Canada, we are working with a midstream energy company on the digital transformation journey to significantly enhance the working experience and job satisfaction of its field force while substantially improving worker productivity and effectiveness. In Australia, for a telecom company, we are enabling the customer experience transformation across the B2B value chain. And in Southeast Asia, we are working with a government health ministry to lay the foundation of their ongoing transformation leveraging digital for citizen services. Second is cloud. Our business-first approach to cloud adoption and building domain-centric solutions with our cloud service providers as our partners has made Wipro a preferred cloud transformation partner for many of our customers. We have heavily invested in cloud studios to help our customers move to cloud at an accelerated pace.

It includes lift and shift, refactoring of applications, replatforming, and moving to truly Agile and DevOps to leverage the power of cloud in a highly automated and industrialized approach. Our strength of our offerings and market presence and success is acknowledged by many industry analysts in their reports. As an example, a global U.S. lifestyle apparel company has partnered with Wipro for a large transformation program after the company was spun off into a separate publicly traded company. The client chose Wipro as the strategic partner to establish a highly secure and scalable architecture leveraging our Cloud Studio offerings. The third is engineering services, where we have revamped our engineering services offering and relaunched Wipro's EngineeringNXT. EngineeringNXT continues to deliver these services by leveraging our innovative IP-driven solutions, rigorous engineering processes, and new-age crowdsourced and Global Shore delivery models.

Historically, Wipro's engineering service practice, as you may be aware, was quite focused on the tech vertical. With EngineeringNXT, we are expanding our services across many more verticals, where we are seeing some very good traction. As an example, a U.S.-based global medical device leader has awarded Wipro a multi-million-dollar deal to enable compliance with the European medical regulatory norms, leveraging expertise of Wipro EngineeringNXT. And the fourth big bet is cybersecurity. We are focused on building a Cyber Defense Assurance Platform and expanding to IoT security practice to address demand due to expanding attack surfaces with connected systems. Cybersecurity as a service offering grew 16.6% year-on-year in Q2. As an example, a large U.S.-based bank has selected Wipro to bolster its cybersecurity defenses and address issues identified during various internal and external audits.

Wipro will design and implement appropriate security controls besides providing incident management and support optimization of the existing risk and control self-assessment process of the bank. As you are aware, we have made a number of venture investments from Wipro Ventures in this space, which are all leveraged to provide these services. We continue to focus on client mining and drive digital and business transformation in accounts that bring together design, domain, and consulting capabilities and help us engage in strategic conversations proactively with clients and various business stakeholders within our accounts. As an example, a leading North American bank with whom Wipro has a strategic relationship has awarded a multi-year application development and support contract, which is the entry of a new service line cross-selling into this account aimed at getting products to market faster and improving customer experience.

Our strategy that I articulated is supported by our M&A, our IP and platforms, talent reskilling, and localization across the markets that we work, where we continue to remain very focused. We are building a robust pipeline of large deals proactively to meet our ambitions of growth. In an environment with ever-changing technology, people remain our primary assets. Our voluntary quarterly annualized attrition rate has dropped from about 17.9% to 16%. We continue to drive localization, and now U.S. is just under 68% local workforce for us, and we continue to do campus hiring, deepening employee engagement, and make significant investments in training and reskilling our workforce. On automation, the work done by bots in fixed-price projects has improved from 15.3% in Q1 to 16.5% in Q2.

In conclusion, despite the current macro environment, we continue to see an improving quarterly growth trajectory, which is reflected in Q2 performance and Q3 guidance. I will now request Jatin, our CFO, to give you an update on our financials.

Jatin Dalal (CFO)

Thank you, Abid. So as you all know, we have come at the midpoint of our guidance. Our margins have remained stable above 18% at 18.1%. As you know, there were tax changes which happened during the course of this quarter, whereby we had our ETR at 18.3% this time. This and the one-time impact we had taken in quarter two of last year has resulted into the overall profit growth of 35.1% and an EPS growth of 36.7%. If you see our Forex hedges, we have $2.7 billion of Forex hedges. Our realization rate for quarter two was 71.56 compared to 70.39 in quarter one. We continue to create and convert good cash of our business. Our operating cash flow was 107% of our net income in quarter two.

We have guided for quarter three 0.8%-2.8% sequential growth, and we'll be happy to take your questions from here.

Operator (participant)

Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may please press star, then one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star, then two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask a question, please press star, then one. The first question is from the line of Mukul Garg from Haitong Securities. Please go ahead.

Mukul Garg (SVP of Equity Research)

Yeah, thanks for the opportunity. Abid, first, I wanted to just understand the decline which we have seen at the top client this quarter. Now, in your media interview, you mentioned that this was basically the end of a couple of projects. So was this in line with your expectation? When can this come back, or are you still seeing a pause in this spend at the top client?

Abid Neemuchwala (CEO)

So Mukul, as you know, we've had quite good success in driving digital transformation in the banking and financial services sector. Our top client happens to be a bank, and we have been doing a lot of digital work for them. Given the current macro uncertainty, as some of our projects got over there in digital, we are seeing a little slowness on renewal of some of those projects in terms of the next phases of the digital programs. I personally believe it's more a matter of time when it comes. Normally, some of these digital programs are done in multiple sprints, and every sprint, we would get an SOW for the next sprint on a continuous basis. At this time, there has been a little bit of slowness in this, but the intent for the client to spend is not gone away.

It is more a question of the spend restarting. Also, there are a couple of programs which successfully got completed, and the new programs that we were expected to get started haven't got started in that same client. So both of these factors have created softness in our top client.

Mukul Garg (SVP of Equity Research)

Understood. And the other part of the question was, was this something which you anticipated at the start of the quarter, or was this a bit of a surprise? And if you can kind of expand this to also include the rest of the outlook on the BFSI vertical, are you seeing weakness across the board?

Abid Neemuchwala (CEO)

Yes. So we are seeing weakness in the BFSI vertical. And as you notice, we've come in the middle of our guidance range, which means that we had built this uncertainty in our guidance. So it has not come to us as a surprise, but we would have been happier if this slowness would not have played out. We could have come higher than the middle of our guidance range. So that is why when we give the guidance as a range, we incorporate some of these uncertainties. So I wouldn't call it a surprise. It is something that we anticipated, and it played out.

Mukul Garg (SVP of Equity Research)

Understood. The other question was on top two to five clients that are also seeing a decline of about 5% QoQ. So what factors are you seeing the impact coming in, or is this also a client-specific correction this quarter?

Abid Neemuchwala (CEO)

No. I think in our top clients, almost 50% of our top clients are in the BFSI segment. So I think the answer is more that some of these clients are also seeing the same macro impact that our top client has seen. If you notice, for the last many quarters, we've grown double-digit in our top 10 client segment, far higher than the company average. And this time, we've grown about 7.4%. So the other clients have done well, but the softness is visible in the banking and financial services clients.

Mukul Garg (SVP of Equity Research)

Understood, and if I can squeeze in one final question for Jatin. Jatin, this quarter's margin management was quite impressive. You had a wage hike, lower utilization, and good employee addition, but still, you have kept margins probably stable. Is this something to do with better pricing or hyper-automation? What really helped you guys?

Jatin Dalal (CFO)

So I would say this was a quarter in which we were able to drive cost optimization from some of our lines, which is visible in the P&L. Some of our marketing events are concentrated in quarter one. Those did not recur, so we got some upside on those spends. We executed well on collections, so PDD were lower. We also got certain benefits on certain cost lines, which we were able to generate as an upside to margin. On the other hand, we used this to invest on some of the bench, which we believe will be critical for us for our growth. We had two-month impact of wage hike, which also, I would say, is an investment in people.

And lastly, we have spoken about our big bet investments, and some of those big bet investments have been made to create additional capabilities on domain solution building, architecting architecture side. Those have also sort of been invested in, and that have adversely impacted margins. And within these two, we were able to keep the margin in a broadly narrow range.

Mukul Garg (SVP of Equity Research)

Understood. Thanks for answering my question. I'll get back into the queue.

Operator (participant)

Thank you. The next question is from the line of Moshe Katri from Wedbush Securities. Please go ahead.

Moshe Katri (Managing Director of Equity Research)

Hey, thanks. Looking at your guidance for the next quarter, is there any contribution from an acquisition? So i.e., is the guidance purely organic, or is there anything else beyond that? And then on top of that, can you talk a bit about the pluses and minuses that kind of resulted in your margin decline sequentially? Thanks.

Jatin Dalal (CFO)

Sure. So there is approximately we completed an acquisition of ITI on 3rd of October. That will flow through in our revenue for quarter three. The contribution of that is likely to be around 0.3%. That is factored in our guidance. The other aspect of other question which you asked, our margin had really three components. We had one-time benefit in form of other operating income of 0.5% in quarter one, which did not recur in quarter two. All the investments on bench, salary increase, and big bets we made was adverse 1.1%. So that was also negative. Cost optimization we were able to drive gave us a benefit of 1.2%. So if you add up those numbers, you will see the movement from 18.4% of quarter one to 18.1% in quarter two.

Moshe Katri (Managing Director of Equity Research)

Thanks, and then just last question. Are some of the trends that you've seen in financial services (I'm assuming these continue beyond the close of the quarter), the question is whether they are kind of getting worse in terms of some of these kind of uncertainty related to the overhang, or they kind of remain consistent? i.e., are you continuing to see delays? Are these accelerating, getting worse? Any color there will be helpful. Thanks a lot.

Abid Neemuchwala (CEO)

So Moshe, this being the last quarter for a lot of the financial services, as you know, some of the financial service organizations have also started doing furloughs, like the manufacturing and tech organizations. So for at least Q3, I would say it will be same or slightly more worse because of the furlough. I am hopeful of an uptick once the IT budgets are decided. I will be able to give a better picture, which in the best case would be around end of the year. But normally, in the last couple of years, we've seen we get clarity only early next year.

Moshe Katri (Managing Director of Equity Research)

Understood. Thanks a lot.

Operator (participant)

Thank you. The next question is from the line of Diviya Nagarajan from UBS Global Asset Management. Please go ahead.

Diviya Nagarajan (Sector Head)

Hi. Thanks for taking my question. You spoke about a few banking wins. Could you kind of talk about where those wins are coming from? Is it from existing clients where you're gaining market share? And if these are market share gains, are you getting it from in-house teams, or is it coming from third-party service providers?

Abid Neemuchwala (CEO)

So Diviya, both. We are having wins. One of the wins, as I mentioned, is ICICI Bank in India, which is a new client for us. We continue to win new clients in the U.S. market as well. They are pretty much in the mid-tier bank space. And then we continue to get win projects in existing clients. As you know, over the past couple of years, we've had significant market share gains in the BFSI space. This quarter, our overall BFSI revenue would be about 31%, which was about five or six% lower just a couple of years back. So that has been because of market share gains.

Diviya Nagarajan (Sector Head)

I know we don't really guide on margins, but given that we've had a fairly decent margins despite the wage hikes, what kind of a trend should we be looking at for the rest of the year? And assuming that you do get growth at these levels because we've been stuck in this early single-digit organic growth range for a while now, how much more leverage is there for us in terms of margins from here on?

Jatin Dalal (CFO)

So Diviya, like I mentioned in the beginning of quarter two, that our priority as an organization remains growth. And we will remain invested in the commitments we have made on big bets, as well as we will remain committed to some of the work we have done on building right capabilities in form of bench, etc. That commentary remains and we will remain consistent with that. So I don't want to guide for margin for quarter three, quarter four, but I do want to say that we have managed it in a trajectory so far, and our endeavor would be that we don't let go of margins. But we will not hesitate to invest if there is a need to invest, if it gives us revenue growth in two quarters from now, for example.

Diviya Nagarajan (Sector Head)

Thanks. All the best for the rest of the day.

Operator (participant)

Thank you. The next question is from the line of Vibhor Singhal from Phillip Capital. Please go ahead.

Vibhor Singhal (Lead Analyst)

Good evening, sir. Thanks for taking my question so obviously, my question to you was majorly on the kind of growth that we have seen in this quarter so I think after a long period of time, we've kind of seen a broad-based growth, which you also mentioned in the opening remarks. Though it is still, I would say, below the industry average, but I think we're still getting there and the key verticals of healthcare and energy and utilities, which were dragging the growth down, seem to be coming up in this quarter so just wanted to check with you on the sustainability of these numbers. In banking, of course, as we know that the top line is declining, and because of an overall weakness, we're also seeing that kind of weakness.

But in terms of, let's say, healthcare, as you mentioned, outside HPS, in E&U, and even in telecom, the kind of positive growth on a Y-on-Y basis that we are seeing, how sustainable are those numbers?

Abid Neemuchwala (CEO)

I'll go vertical by vertical. Banking has been industry-leading for us last few quarters, but right now, we are seeing softness. We continue to monitor the macro environment on the BFSI space. In Communications, I feel pretty good. Our global business has delivered double-digit growth. The numbers that you see of about 2.4% in constant currency year on year are diluted numbers because of what is happening in the India market, where we have a very large share in the Communications segment. I feel quite good, continue to feel good with the consumer sector. We've done well, including this quarter, and similarly, in Energy and Utilities, I think we are making the right moves. There are certain uncertainties that we'll have to watch out in terms of projects getting over and new projects which are likely to start, but we have had a good quarter.

On a year-on-year basis, as you see, we've grown well, except for macro and the time sometimes it takes between two projects. I feel pretty good on E&U. Health, as you rightly pointed out, outside of HPS. HPS, we were degrowing for a long time. I think it has now flattened, which essentially means that although HPS will have a denominator effect, but we are winning well in the rest of the business, and hence, we will continue to see growth in the health vertical. Manufacturing, we're still undergoing our restructuring and rejuvenation of that business. I see strong pipeline. Some of the bets we have made as I outlined around engineering, around IoT, some of the ADAS and others in the auto industry. We are doing a lot of engagements, pilots with customers.

I'm quite hopeful of a turnaround in that business, but I would give it a couple of quarters. Technology, we do see a little weakness in the silicon side of the business. We do a lot of work with tech companies or challenges with those individual customer organizations. Overall, we have got a good pipeline and good set of deal wins in the technology vertical. Overall, I do believe that we'll be able to maintain secular growth, and we'll have to take it one quarter at a time. On Q3, I feel quite good. As we progress, we will keep you updated.

Vibhor Singhal (Lead Analyst)

If I could just harp a bit more on two specific verticals. One is on the consumer vertical. I think as of now, as we see a couple of your peers who have reported numbers have actually reported quite weak numbers in the retail segment and have also cautioned in terms of future outlook because of the ongoing global trade war that clients are deferring their spend. Do you also foresee some of that kind of scenario playing out that might impact our consumer business? In BFSI, if I just may scratch it a bit more, how close to bottoming out do you think we are in terms of our top client?

Abid Neemuchwala (CEO)

So I will answer the BFSI question, and then I will let Srini talk about consumer. But I think a lot of the engagements that they wanted to pause have been paused. So I feel quite good about the top client now. We would wait definitely through Q3, and then we would have a commentary early in Q4 as we see their first quarter playing out and how the IT budgets get defined. I'm sure all of you are from the financial services industry, so you'll have an insight on that as well. On Consumer, we're doing pretty well because, like BFSI, we have led through our digital proposition, and every part of the Consumer business is digitally transforming itself. So I feel good, and I'll let Srini give a little more color to our consumer verticals.

Srini Pallia (President of Consumer Business Unit)

Sure. Thanks, Vibhor. Thanks, Abid. I agree with you, especially on the retail side of the business. It has a very strong correlation to global macro indicators, and obviously, that reflects in some of our customer spend. But if you look at one of the largest markets for retail in the U.S., for example, there are mixed signals, whether you talk about the interest rate or trade or unemployment. But having said all that, as far as we are concerned, we see traction, like Abid talked about, helping our customers reinvent business and operating models with a digital-first approach. I think that has been very key for our customers. And most of our retailers, they are investing in areas where they want to differentiate from their competition. So the classic omnichannel customer experience are definitely the focus area.

And some of the engagements that we have had with our customers is around the supply chain reimagination, also the customer journey mapping, which is becoming very, very critical for us. So the whole aspect of customer convenience, whether it's returns management or reverse logistics, those are some of the areas that we are kind of getting engaged with. And also the consumer brand companies, right? They are driving D2C. What I mean by that is direct-to-consumer. And in some of them, I think Abid called out one of the wins that we had this quarter. We are setting up a greenfield technology and creating operating platforms. So it's all about building a state-of-the-art digital footprint and also modernizing their entire IT landscape across applications, infrastructure, and security. And this actually we're doing for a large global apparel company.

Some of the things we're doing, very creative stuff, leveraging our crowdsourcing. We actually won, this has also been talked about by Abid. We're doing a crowd-powered AI and data consulting engagement for one of our large customers, which are more into retail and distribution as well. Broadly, retail as an industry is going through transformation, also sometimes turbulence. The way we see it is the challenges, for example, if you look at the subsegments, the challenges of a fashion retailer's vision is very different from a grocery retailer. Or if you look at the priorities of discount retailers from an online retailer, it's very different. Big box retailers, they have their own challenges. They have their own strategies to counter this turbulence.

So it's an interesting time from a technology point of view to help ride through the wave, if you will, for the consumer industries across retail, CPG, and others. So that would be my short answer to your question.

Vibhor Singhal (Lead Analyst)

Sure. Thanks, Srini. So if I were to summarize, is it okay to say that given the mix of our clients in the retail segment, I know projecting long-term is difficult, but at least given the mix of our clients, in the short or the very near term, we don't see any significant headwinds in the Retail segment?

Srini Pallia (President of Consumer Business Unit)

I would agree with Abid's comment, yeah.

Vibhor Singhal (Lead Analyst)

Sure. Thanks a lot. Thanks a lot, sir. I wish you all the best.

Srini Pallia (President of Consumer Business Unit)

Thank you.

Operator (participant)

Thank you. The next question is from the line of Shashi Bhushan from Axis Capital. Please go ahead.

Shashi Bhushan (Senior Equity Analyst)

Yeah. Thanks for taking my question. So we have gone through the restructuring in Middle East and India business over the last few quarters. In that context, can you please tell me what was the rationale behind Wipro Infotech deal and what actually was the value proposition of that deal that attracted us to the asset?

Abid Neemuchwala (CEO)

So as I've said before, we have and we had market leadership in both India and Middle East. But over time, the kind of services that we were providing did not fit the overall company strategy, which is essentially, as you know, around driving digital. And these markets are very rich opportunities for digital. And they were focused more on commodity business. So we put together a new team about a year, year and a half back. We gave some investment to the team. We gave them the ability to finish the projects that we had already taken successfully for our customers and then pivot the business into the new areas aligned to our strategy.

And the second thing that we wanted to do is, historically, Wipro had a separate what used to be called as Wipro Infotech, a separate brand and a separate entity to service India and Middle East. Whereas we saw that there is a much bigger opportunity to be able to bring the global expertise into this part of our business to be able to be successful over here. And the ICICI deal that you referred to is a great example of vindication of that strategy because as banks or other enterprises truly adopt what I would put under Digital India, there is a lot of experiences that we can bring from the global markets, which they may or may not be getting from their current providers.

So that is why they've signed a deal with us with a revenue commitment so that we take over their current landscape and then drive the transformation that they want to undergo and bring the might of Wipro from all of our investments across digital, across cloud, across the Wipro Ventures innovation, and so on and so forth. So while it is early days and we are just embarked on the engagement, and right now, through the asset transfer and people transfer, we're integrating that. But there is a roadmap for transformation that will bring value to our customer as well as give us an opportunity to build a platform through which we can bring those services across the many other Indian banks and other customers. So that's a good pilot example of how we are executing on our strategy and vindication that customers see value in that strategy.

Shashi Bhushan (Senior Equity Analyst)

So pretty interesting, sir. You said that deal pipeline in Q2 is stronger than that was in Q1. Any quantitative color for the same would be helpful.

Abid Neemuchwala (CEO)

While the pipeline is stronger, I talked about the order book was better in Q2 compared to Q1. So if you recollect in Q1, we were a little surprised because some of the deals that we were declared as being the winner by the end of Q4 or during Q1, there were inordinate delays in signing those deals. I think some of that was a reflection of the macro uncertainties where customers were taking a little longer. We were fortunate that a large part of those deals got signed in Q2, and that is also reflected in our Q3 revenue guidance as some of those deals will start delivering revenues to us in Q3.

Shashi Bhushan (Senior Equity Analyst)

Yeah. On margin front, sir, we have shown commitment for investment in some of the newer areas and newer strategic initiatives. So where are we in terms of investment? And was there any impact of the same in this quarter also?

Jatin Dalal (CFO)

That is right, Shashi. We have said that we have focused investment in these four spaces. We have not called out as a percentage of margin every quarter how much we have now incrementally added to it. But one data point itself is visible on data sheet, both in terms of, of course, the bench and utilization number. But if you also see the sales and support headcount, there is a significant addition there, and some of that is for the big bet. That number remains. It goes up and down, but this quarter, you will see a meaningful increase in that number, Shashi.

Shashi Bhushan (Senior Equity Analyst)

All the very best for the rest of the year, sir. Thanks.

Jatin Dalal (CFO)

Thank you, Shashi.

Operator (participant)

Thank you. The next question is from the line of Sandeep Shah from CGS-CIMB. Please go ahead.

Sandeep Shah (Director)

Yeah. Thanks for the opportunity. Just one clarity. Abid, just wanted to understand within the top client, is it fair to say most of the rundowns is done and over in the Q2, and you believe that you have to wait for Q3 in terms of an uptick, or you still believe there is some tail pending in terms of the rundowns into second half?

Jatin Dalal (CFO)

So Sandeep, as Abid commented earlier, this segment of customers is difficult to predict in the last quarter of the year. So I would not hazard a guess right now. We, of course, have an indication, but we will see how the quarter pans out. Right now, I would say it's still an uncertain outlook where exactly it will end at the end of this quarter.

Sandeep Shah (Director)

Okay. And just further to that, is it these rundowns started at the end of the quarter, or has that been start from the July itself?

Jatin Dalal (CFO)

Sandeep, I wish we could share that many details, but you can see that if it has impacted revenue for the quarter, that it is certainly not the end of the quarter rundowns.

Sandeep Shah (Director)

Okay. And just a few things. If I look into the cost line item of miscellaneous expenses, it has come down significantly from a quarterly average of INR 150 crores-INR 190 crores to as low as INR 70 crores. So most of these savings are recurring, or how should we look at it? Because your sales and marketing expense ratio is at multi-quarter low. Even your G&A expense is at multi-quarter low. So how to model those expenses going forward?

Jatin Dalal (CFO)

So I think the right way to model would be that they would go back to their run rate numbers. Some of these cost savings are because we have put additional effort. For example, I will come back to miscellaneous. For example, PDD is lower because we have indeed done very well on our collections in certain parts of our government business in India, as well as we have done very well on our collections in certain parts of Middle East business. And that has resulted in our provision for doubtful debts being reversed, and that has given us an uptick in G&A line. Miscellaneous expenses was certain cost credits that we could see it coming, and we have invested that as part of the people cost bench investment that we think were right to be invested in the current quarter.

While these costs will come back to their normalcy to a great extent, I should say, but we would be able to use the lever of the utilization, our pyramid, and most importantly, our automation, which we spoke about in our press conference, to manage our margins going forward.

Sandeep Shah (Director)

Okay. Okay. Just wanted to understand what does exactly mean the cost credits? Why these line items remain volatile on a Q1, Q2 basis? Just wanted to understand that.

Jatin Dalal (CFO)

Yeah. So these are on an ongoing basis, you are carrying certain costs. And when you make an assessment that certain cost as an expense line you did not carry for this quarter, you don't no longer take the provision for that, or you have a reversal regarding that. That much I can share with you.

Sandeep Shah (Director)

Okay. Okay. And last thing, in terms of the provision for doubtful debts reversal, because is it more linked to the ISRE business, or because that business loss has also come down significantly, or it's also equally split between IT service and the ISRE?

Jatin Dalal (CFO)

This is both ISRE as well as the Middle East, which is part of our global IT business.

Sandeep Shah (Director)

Okay. Okay. Thanks and all the best.

Operator (participant)

Thank you. The next question is from the line of Ashwin Mehta from IDFC Securities. Please go ahead.

Ashwin Mehta (Director)

Yeah. I had one question in terms of the effective tax rate. What should we model in for FY 2020 and 2021 going forward?

Jatin Dalal (CFO)

Sorry, Ashwin, can you repeat?

Ashwin Mehta (Director)

Yeah. I was asking in terms of what the ETR would be for FY 2021.

Jatin Dalal (CFO)

I think it will be. We are still studying the tax proposals, but I would say that between 20% and 21% would be a good estimate at current point in time.

Ashwin Mehta (Director)

Okay. Okay. And secondly, in terms of your S&M cost, given the sales and support headcount increase, because that's one cost item which has actually seen a reduction over a period of time, do you think this will possibly get elevated going forward to drive the growth, or these are more sustainable levels that you're working with?

Jatin Dalal (CFO)

Yeah. So these are, I would say, from an S&M standpoint, there will always be some quarter uptick or some quarter reduction because there are certain marketing spends which remain lumpy in our business. Now, I would correlate that with the sales and support headcount, which is higher, but a lot of that support headcount is really part of our Cost of Goods Sold and not part of S&M because many of these investments are people who do both presales and delivery, and therefore, they are classified as Cost of Goods Sold, and hence, it is difficult to correlate the sales and support line as an aggregate with just S&M number.

Ashwin Mehta (Director)

Okay. So as such, from an S&M perspective, there doesn't appear to be a material uptick expected there.

Jatin Dalal (CFO)

That is right. Yes.

Ashwin Mehta (Director)

Okay. Thank you and all the best.

Operator (participant)

Thank you. The next question is from the line of Dipesh Mehta from SBICAP Securities. Please go ahead.

Dipesh Mehta (Senior Research Analyst)

Yeah. Thanks for the opportunity. Two questions. First, on the geographic-wise, if we look at Europe and rest of the world, now weakness persists for both the segment, which is roughly 40% of our revenue. So if you can help us understand what is leading to persisting weakness in these two geographies and how you expect it to play out over near as well as medium term? Second question is about the segmental margin which we report in BFSI and Communications. If we look at segmental margin, we have seen some weakness in segmental margin of these two verticals. If you can provide some perspective, despite doing well in Communications side and even mixing some kind of favorable shift towards developed markets, it seems to have some weakness on margin side. Thank you.

Abid Neemuchwala (CEO)

Yes. So I'll answer the first question, and then I'll let Milan Rao and Angan Guha address the margin question for their segments. So essentially, in Europe, primarily, the uncertainty around Brexit is one area, and second is the overall impact of we have a lot of banking and capital market customers in Europe. So both of those and the intersection of those two are contributing to the weakness that you see. These are all part of some of our large accounts. So while we have robust new accounts being added over there, but some of the drops coming from there are resulting into a negative growth that you see in Europe.

Dipesh Mehta (Senior Research Analyst)

Abid, by when, because it is now for some time. So now, do you expect because we expect some of the top account closer to bottoming out, do you expect, let's say, now Europe should turn around in the next couple of quarters for us?

Abid Neemuchwala (CEO)

Yeah, so our base business in Europe is still coming from some of the banking and financial services customers. I don't know, as we answered in the earlier question for the top customer, we don't know how next year will pan out, so I would kind of go quarter by quarter. As I said, our new deal wins are quite healthy. For example, we won a banking client in Germany, which is a mid-tier customer in the last quarter. There are other wins we've had. But as you know, some of these wins start small and then grow over time, whereas when we have some of the rundowns in the larger banking and capital market accounts, they are quite significant, and that reflects on the numbers that you see over here.

So I would still say anything to do with getting impacted in the BFSI space, I would just keep watching quarter on quarter. Milan?

Milan Rao (President)

Yeah, well, on the communication side, in general, we have seen a strong growth in the global side of the business, and as Abid articulated, there was some weakness on the India side. The weakness on the India side was also from the margin perspective, and therefore, that is what is impacting the overall number. On the global side, we do not see any significant challenge on margins.

Angan Guha (SVP and Business Unit Head)

On the BFSI side, because the revenue has decelerated over Q1, we have seen certain impacts on margin. We'll have to watch this space over the next couple of quarters, how the revenue shapes up. Only then will we be able to comment in terms of how the margin looks.

Abid Neemuchwala (CEO)

As you know, for the global business, the employee base is quite redeployable. Some of the deals that we would get, for example, in the consumer segment, a lot of the digital resources and data resources from BFSI are redeployable. In the short term, you see a margin impact. Over a medium term, we are able to repurpose and redeploy the deployable bench.

Dipesh Mehta (Senior Research Analyst)

Sure. And last, just clarification. In BFSI, do we see weakness also in U.S. side, or it is largely Europe for us?

Abid Neemuchwala (CEO)

So in BFSI, the weakness is more in Europe than in the U.S. But if you look at sectorally, from a sector perspective, I think it's more on the capital market side.

Dipesh Mehta (Senior Research Analyst)

Understood. Thank you.

Operator (participant)

Thank you. The next question is from the line of Abhay Moghe from Bajaj Allianz. Please go ahead.

Abhay Moghe (Fund Manager and Senior Research Analyst)

Good evening. The question is to Abid. It's been almost four and a half years that you joined Wipro. Now, you have had some unfortunate experiences like HPS acquisition or client bankruptcies, and some fortunate things you and your team were able to execute good on the BFSI and some good acquisitions like Designit or Appirio. My question is, what's your point of view on where you are in an overall journey to bring Wipro to industry-leading growth? It's near term. You can see it happening in the next two quarters, one year, or you think, no, it's still some time away, and maybe some problems like they are so ingrained that they may take quite a while to resolve. So what's your point of view?

Abid Neemuchwala (CEO)

So I don't see any problem that will take quite a while to resolve. I think we clearly articulated a strategy. We relentlessly are executing on that strategy. We are seeing good results on that strategy, whether it is on building capabilities, as you rightly mentioned. We've both acquired and organically built capabilities that make us quite futuristic. In areas like client mining and account execution, we made significant investments. Our customer satisfaction today is one of the highest in our history. So I feel quite good about it. I think what we need to continue to do is relentlessly execute and make sure that even in some of the macro spaces, there is always an opportunity in some of the slowdowns and some of the economic cycles. And we need to just make sure that we make the most of those opportunities.

Abhay Moghe (Fund Manager and Senior Research Analyst)

Okay. Thanks.

Operator (participant)

Thank you. The next question is from the line of Girish Pai from Nirmal Bang. Please go ahead.

Girish Pai (Head of Equity Research)

Yeah. Thanks for the opportunity. I just want to circle back to the margin question. Jatin, are you kind of implying that the 18%-18.5% is kind of peak margins because you mentioned that whatever savings you're going to get, you're going to reinvest back into the business? So from a three-year perspective, would the 18.5% be kind of a peak margin that you're going to see?

Jatin Dalal (CFO)

It's difficult to call from a three-year standpoint. Our aspiration certainly would be to go beyond 18%-18.5% range. My comment was vis-à-vis the fact that we had a certain visibility of cost credits and cost benefits that we were able to execute in quarter two, which we have invested back. Some of those may not continue in quarter three, but we will execute on other levers for quarter three. Also, our overarching commentary on margin is that we have to remain invested to get the growth to a better trajectory. And once the growth comes, as we all know, margin always follows. That's the overall hypothesis with which we are working with Girish. It's difficult to call out specific numbers or ranges beyond that.

Girish Pai (Head of Equity Research)

Okay. My second question is probably a little basic. It's to do with the realized INR rate. I think for many years now, Wipro has had a much higher realized rate in INR. What exactly is playing out there? Is it your treasury? Why are you getting a rupee more than your peers in the market?

Jatin Dalal (CFO)

So Girish, we can certainly explain the cash flow hedge accounting that we do. Maybe Aparna or Abhishek from IR team can explain that. We have remained very consistent with our hedging policy, as I have articulated every quarter, and that certainly has played out well for us. I am unable to compare with others, but we can certainly explain the accounting methodology that we use for our segmental reports.

Girish Pai (Head of Equity Research)

Okay. My last question is regarding pricing or gross margin in your digital business. How much more would that be vis-à-vis your company-level margins? Or say, if you want to talk about pricing, how much higher would, say, digital services pricing be vis-à-vis your normal onsite pricing?

Jatin Dalal (CFO)

Yeah. So Girish, the pricing both onsite and offshore is definitely higher than the traditional services. However, these resources also are more expensive. So right, we get into a better trajectory of margins as we get into larger projects and on a more sustained revenue stream. There are also, I would say, marketing or capability, digital experience kind of investments that we have done in digital partners all over the world. And some of that also reduces our profitability of our projects. But overall, pricing is certainly significantly superior in some of the projects, superior in other projects.

Girish Pai (Head of Equity Research)

Can I squeeze one last question in this regarding your order book or order inflow? In the last few quarters, has it been more renewal-type order inflow that you're getting, or it's like net new kind of order inflow?

Jatin Dalal (CFO)

So we don't break that out. But if you reflect on the comment I made, that there were certain deals which were delayed, which have got signed in Q2, and we are starting new projects, which is reflected in the revenue guidance that we have given, that is incremental revenue. So those would be new deals.

Girish Pai (Head of Equity Research)

Okay. Thank you very much.

Operator (participant)

Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Ms. Aparna Iyer for closing comments.

Aparna Iyer (VP and Corporate Treasurer)

Thank you all for joining the call. In case we couldn't take your questions due to time constraints, please feel free to reach out to the investor relations team. Thank you and have a nice day.

Operator (participant)

Thank you very much. Ladies and gentlemen, on behalf of Wipro, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.