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Edited Transcript of WIPRO.NSE earnings conference call or presentation 15-Oct-19 1:45pm GMT

Half Year 2020 Wipro Ltd Earnings Call

Bangalore, Karnataka Oct 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Wipro Ltd earnings conference call or presentation Tuesday, October 15, 2019 at 1:45:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Abidali Z. Neemuchwala

Wipro Limited - CEO, MD & Executive Director

* Angan Arun Guha

Wipro Limited - SVP & Global BU Head of BFSI

* Aparna C. Iyer

Wipro Limited - VP & Corporate Treasurer

* Jatin Pravinchandra Dalal

Wipro Limited - CFO

* Milan Rao

Wipro Limited - President of Mkt, Innovation & Technology and Global Head of Manufacturing & Communications Business

* Srinivas Pallia

Wipro Limited - President of Consumer Business Unit

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Conference Call Participants

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* Abhay Moghe

Bajaj Allianz Life Insurance Company Limited - Research Analyst

* Ashwin Mehta

IDFC Securities Limited, Research Division - Director

* Dipesh Mehta

SBICAP Securities Ltd., Research Division - Information Technology Analyst

* Diviya Nagarajan

UBS Investment Bank, Research Division - Executive Director and Research Analyst

* Girish Pai

Nirmal Bang Securities Pvt. Ltd., Research Division - Head of Research

* Moshe Katri

Wedbush Securities Inc., Research Division - MD of Equity Research & Senior Equity Research Analyst

* Mukul Garg

Haitong International Research Limited - Research Analyst

* Sandeep Shah

CIMB Research - VP

* Shashi Bhusan

Axis Capital Limited, Research Division - Executive Director of IT and Telecom

* Vibhor Singhal

PhillipCapital (India) Pvt. Ltd., Research Division - VP & Lead Analyst of Infrastructure and IT Services

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Wipro Limited Q2 FY '20 Quarterly Investor Conference Call. (Operator Instructions) 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.

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Aparna C. Iyer, Wipro Limited - VP & Corporate Treasurer [2]

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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 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 Reforms Act 1995. These statements are based on management's current expectations and are associated with uncertainties and risks, which may cause the actual results to may 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.

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Abidali Z. Neemuchwala, Wipro Limited - CEO, MD & Executive Director [3]

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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 and 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 utility 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 remain volatile, impacting the overall growth of the communication segment. We see early signs of recovery in both manufacturing and health. We see an uptick and 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 health care 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 have 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 2 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 4 pillars: our 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 4 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 4 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 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, re-factoring of applications, re-platforming and moving to truly agile and DevOps to leverage this power of cloud in a highly automated and industrialized approach.

Our strength and offerings -- 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 Engineering NXT. Engineering NXT continues to deliver these services by leveraging our innovative IP-driven solutions, rigorous engineering processes and new age crowd-sourced and global source delivery models. Historically, Wipro's engineering service practice, as you may be aware, was quite focused on the tech vertical. With Engineering Next, we are expanding our services across many more verticals where we're seeing some very good traction.

As an example, a U.S.-based global medical device leader has awarded Wipro a multimillion dollar deal to enable compliance with the European medical regulatory norms, leveraging expertise of Wipro Engineering NXT.

And the fourth big bet is cybersecurity. We are focused on building 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. A large -- 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've made a number of a 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 strategic relationship, has awarded a multiyear 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 re-skilling and localization across the market that we work where we continue to be -- 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 re-skilling 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.

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Jatin Pravinchandra Dalal, Wipro Limited - CFO [4]

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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 onetime impact we had taken in quarter 2 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 2 was INR 71.56 compared to INR 70.39 in quarter 1. We continue to create and convert good cash of our business. Our operating cash flow was 107% of our net income in quarter 2. We have guided for quarter 3 0.8% to 2.8% sequential growth, and we'll be happy to take your questions from here.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Mukul Garg from Haitong Securities.

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Mukul Garg, Haitong International Research Limited - Research Analyst [2]

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First wanted to just understand the decline which we have seen at the top client this quarter. Now in your meeting, too, you mentioned that this was basically end of couple of projects. So was this in line with your expectation? When can this come back? Or are you see -- still seeing some -- a pause in this spend at the top client?

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Abidali Z. Neemuchwala, Wipro Limited - CEO, MD & Executive Director [3]

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So Mukul, as you know, we've had quite a 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 have seen 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. This time, there has been a little bit of slowness in this. But the intent for the client to spend has 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.

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Mukul Garg, Haitong International Research Limited - Research Analyst [4]

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

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Abidali Z. Neemuchwala, Wipro Limited - CEO, MD & Executive Director [5]

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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 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.

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Mukul Garg, Haitong International Research Limited - Research Analyst [6]

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Understood. The other question was on top 2 to 5 clients. That has also seen a decline of about 5% Q-o-Q. So what factors are you seeing the impact coming in? Or is this also a client-specific correction this quarter?

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Abidali Z. Neemuchwala, Wipro Limited - CEO, MD & Executive Director [7]

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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 in the last -- for the last many quarters, we've grown double digit in our top 10 clients 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.

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Mukul Garg, Haitong International Research Limited - Research Analyst [8]

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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 broadly stable. Is this something to do with a better pricing or hyper-automation? What really helped you guys?

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Jatin Pravinchandra Dalal, Wipro Limited - CFO [9]

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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. Our -- some of our marketing events are concentrated in quarter 1. Those did not recur, so we got some upside on those spends. We executed while on collections, so PDD were lower. We also got certain benefits on certain cost lines which we were able to generate as a upside to margin.

On the other hand, we used this to invest on the -- on some of the bench which we believe will be critical for us for our growth. We had 2 months 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. So and within this, too, we were able to keep the margin in a broadly narrow range.

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Operator [10]

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The next question is from the line of Moshe Katri from Wedbush Securities.

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Moshe Katri, Wedbush Securities Inc., Research Division - MD of Equity Research & Senior Equity Research Analyst [11]

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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 pluses and minuses that kind of resulted in your margin decline sequentially?

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Jatin Pravinchandra Dalal, Wipro Limited - CFO [12]

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Sure. So there is approximately -- we completed an acquisition of ITI on 3rd of October. That will flow through in our revenue for quarter 3. The contribution of that is likely to be around 0.3%. That is factored in, in our guidance. The other aspect of -- other question which you asked, our margin had really 3 components. We had onetime benefit of -- in form of other operating income of 0.5% in quarter 1, which did not recur in quarter 2. All the investments on bench, salary increase and big bets we made was adverse 1.1%. So that was also negative. The 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 1 to 18.1% in quarter 2.

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Moshe Katri, Wedbush Securities Inc., Research Division - MD of Equity Research & Senior Equity Research Analyst [13]

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Helpful. 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 would be helpful.

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Abidali Z. Neemuchwala, Wipro Limited - CEO, MD & Executive Director [14]

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So Moshe, as 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 a 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.

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Operator [15]

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The next question is from the line of Diviya Nagarajan from UBS Global Asset Management.

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Diviya Nagarajan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [16]

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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?

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Abidali Z. Neemuchwala, Wipro Limited - CEO, MD & Executive Director [17]

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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 U.S. market as well and 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 5% or 6% lower, just a couple of years back. So that has been because of market share gains.

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Diviya Nagarajan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [18]

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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?

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Jatin Pravinchandra Dalal, Wipro Limited - CFO [19]

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So Diviya, like I mentioned in beginning of quarter 2, 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, et cetera. That commentary remains and it will remain consistent with that. So I don't want to guide for margin for quarter 3, quarter 4, 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 2 quarters from now, for example.

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Operator [20]

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The next question is from the line of Vibhor Singhal from PhillipCapital.

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Vibhor Singhal, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Lead Analyst of Infrastructure and IT Services [21]

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So Abid, 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, you've kind of seen a broad base 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 health care and the energy and utilities which were dragging the growth down seemed 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 a weakness. But in terms of, let's say health care 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?

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Abidali Z. Neemuchwala, Wipro Limited - CEO, MD & Executive Director [22]

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So I'll go vertical by vertical. Banking has been industry-leading for us last few quarters, but right now we are seeing softness. We'll 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 communication 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 and on a year-on-year basis, as you see, we've grown well, except for macro and the time, sometimes it takes between 2 projects. I feel pretty good on E&U. Health, as you rightly pointed out, outside of HPS and you know, HPS, we were de-growing 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 are still undergoing our restructuring and rejuvenation of that business. I see strong pipeline. Some of the bets we have made as I had 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. So 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. There are a couple of customers where we had had customer-specific issues through -- because of acquisitions or challenges with those individual customer organizations. But overall, we have got a good pipeline and good set of deal wins in the technology vertical. So overall, I do believe that we'll be able to maintain secular growth and we'll have to take it 1 quarter at a time. On Q3, I feel quite good. And as we progress, we will keep you updated.

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Vibhor Singhal, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Lead Analyst of Infrastructure and IT Services [23]

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If I could just harp a bit more on 2 specific verticals. One is on the consumer vertical. I think as per NAV, if you see the couple of peers, your couple of 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 differing their spend. Do you also foresee some -- that kind of scenario playing out that might impact our consumer business? And in BFSI, if I just may scratch it a bit more, how close to bottom do you think -- how close to bottoming out do you think we are in terms of our top line?

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Abidali Z. Neemuchwala, Wipro Limited - CEO, MD & Executive Director [24]

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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. So we should have -- 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 will have an insight on that as well. On consumer, we're doing pretty well because like BFSI, we have led through a 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 vertical.

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Srinivas Pallia, Wipro Limited - President of Consumer Business Unit [25]

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So thanks, Abid. I agree with you on the -- especially on the retail side of the business, it has a very strong relation to global macro indicators and obviously that reflects in some of our customer spends. But if you look at our large -- one of the largest markets for retail, 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 omni-channel customer experience are definitely the focus area. And some of the engagements that we have had with our customers is around the software chain re-imagination, also the customer journey mapping which is becoming very, very critical for us. So the whole aspects of customer convenience, whether it's returns management or reverse logistics, those are just some of the areas that we're kind of getting engaged well. And also the consumer brand companies, right, they are driving B2C, 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 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 application, infrastructure and security. And this actually we're doing for a large global apparel company. And some of the things we're doing are very creative stuff, leveraging out on crowd sourcing. We actually -- one, this has also been talked about by Abid, we're doing a cloud-powered AI and data consulting engagement for one of our large customers, which are both in retail and distribution as well. So broadly, retail as an industry is going through transformation, also sometimes turbulence. And the way we see it is the challenges, for example, if you look at the subsegments, the challenges of a fashion retailers, this is very different from a grocery retailer or if you look at the priorities of discount retailers from an online retailer is very different. With both 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.

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Vibhor Singhal, PhillipCapital (India) Pvt. Ltd., Research Division - VP & Lead Analyst of Infrastructure and IT Services [26]

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Sure. 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?

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Srinivas Pallia, Wipro Limited - President of Consumer Business Unit [27]

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I would agree with what -- I would agree with Abid's comment, yes.

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Operator [28]

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The next question is from the line of Shashi Bhusan from Axis Capital.

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Shashi Bhusan, Axis Capital Limited, Research Division - Executive Director of IT and Telecom [29]

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So we have gone through the restructuring in the Middle East and India business over the last few quarters. In that context, can you please tell me what was the rationale behind Vara Infotech deal and what actually was the valuable provision of that deal that attracted us to the asset?

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Abidali Z. Neemuchwala, Wipro Limited - CEO, MD & Executive Director [30]

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So as I have said before, we had -- 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 1 year, 1.5 year 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 as 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 committed -- 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 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 road map 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 customer see value in that strategy.

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Shashi Bhusan, Axis Capital Limited, Research Division - Executive Director of IT and Telecom [31]

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

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Abidali Z. Neemuchwala, Wipro Limited - CEO, MD & Executive Director [32]

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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 deal 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.

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Shashi Bhusan, Axis Capital Limited, Research Division - Executive Director of IT and Telecom [33]

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On margin front, sir, we've 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?

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Jatin Pravinchandra Dalal, Wipro Limited - CFO [34]

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That is right, Shashi. We have said that we have focused investment in these 4 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.

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Operator [35]

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The next question is from the line of Sandeep Shah from CGS-CIMB.

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Sandeep Shah, CIMB Research - VP [36]

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Yes. Just one clarity. Abid, just wanted to understand within the top client, is it fair to say most of the ramp downs 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 ramp downs into second half?

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Jatin Pravinchandra Dalal, Wipro Limited - CFO [37]

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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 uncertain outlook where exactly it will end at the end of quarter, this quarter.

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Sandeep Shah, CIMB Research - VP [38]

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Okay. Just further to that, is it these ramp downs started at the end of the quarter? Or is that being start from the July itself?

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Jatin Pravinchandra Dalal, Wipro Limited - CFO [39]

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Sandeep, this is -- 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 ramp downs.

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Sandeep Shah, CIMB Research - VP [40]

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Okay, okay, okay. And Jatin, just 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 expenses at multi-quarter low. So how to model those expenses going forward?

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Jatin Pravinchandra Dalal, Wipro Limited - CFO [41]

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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 part of our government business in India as well as we have done very well on our collection in certain parts of Middle East business. And that has resulted in our provision for doubtful debt being reversed and that has given us an uptick in G&A line.

Miscellaneous expenses was certain cost credit 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 this cost will come back to their normalcy to a certain -- to a great extent, I should say. But we would be able to use the lever of the utilization of our pyramid and most importantly, our automation, which we spoke about in our press conference, to manage our margins going forward.

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Sandeep Shah, CIMB Research - VP [42]

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Okay. Okay. Got it. Jatin, just wanted to understand how -- what does exactly mean the cost credits? Why these line item remain volatile on a Q-on-Q basis? Just wanted to understand that.

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Jatin Pravinchandra Dalal, Wipro Limited - CFO [43]

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Yes. 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 need 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.

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Sandeep Shah, CIMB Research - VP [44]

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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?

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Jatin Pravinchandra Dalal, Wipro Limited - CFO [45]

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

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Operator [46]

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The next question is from the line of Ashwin Mehta from IDFC Securities.

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Ashwin Mehta, IDFC Securities Limited, Research Division - Director [47]

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Yes, I had 1 question in terms of the effective tax rate. What should we model in for FY '20 and '21 going forward?

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Jatin Pravinchandra Dalal, Wipro Limited - CFO [48]

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Sorry, can you -- Ashwin, can you repeat? ETR...

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Ashwin Mehta, IDFC Securities Limited, Research Division - Director [49]

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Yes, I just wanted to get a sense in terms of what the ETR would be for FY '20, '21?

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Jatin Pravinchandra Dalal, Wipro Limited - CFO [50]

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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.

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Ashwin Mehta, IDFC Securities Limited, Research Division - Director [51]

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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?

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Jatin Pravinchandra Dalal, Wipro Limited - CFO [52]

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Yes, so these are from -- 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 these are -- 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 the just S&M number.

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Ashwin Mehta, IDFC Securities Limited, Research Division - Director [53]

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

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Jatin Pravinchandra Dalal, Wipro Limited - CFO [54]

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That is right.

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Operator [55]

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Our next question is from the line of Dipesh Mehta from SBICAP Securities.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [56]

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Two questions. First on the geographic-wise, if one look at Europe and rest of the world, now weakness persist for both the segments, which is roughly 40 percentage of our revenue. If you can help us understand what is leading to persisting weakness in these 2 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 communication. If one look at segmental margin, we have seen some weakness in segmental margin of these 2 verticals. If you can provide some perspective, despite doing well in communication side and even mix is some kind of favorable shift towards developed markets, it seems to have some weakness on margin side?

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Abidali Z. Neemuchwala, Wipro Limited - CEO, MD & Executive Director [57]

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Yes. So I'll answer the first question and then I'll let Milan and Angan 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 -- the intersection of those 2 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.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [58]

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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? So do you expect, let's say now Europe should turn around in next couple of quarters for us?

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Abidali Z. Neemuchwala, Wipro Limited - CEO, MD & Executive Director [59]

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Yes. So our base business in Europe 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 is 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 ramp downs in the larger banking and capital market accounts, they're quite significant. And that reflects on the number that you see over here. So I would still -- anything to do with getting impacted through the BFSI space, I would just keep watching quarter-on-quarter. Milan?

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Milan Rao, Wipro Limited - President of Mkt, Innovation & Technology and Global Head of Manufacturing & Communications Business [60]

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Yes. 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.

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Angan Arun Guha, Wipro Limited - SVP & Global BU Head of BFSI [61]

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And on the BFSI side because the revenue has de-accelerated over Q1, we have seen certain impacts on margin. So we'll have to watch this space over the next couple of quarters how the revenue shapes up. And only then we will be able to comment in terms of how the margin looks.

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Abidali Z. Neemuchwala, Wipro Limited - CEO, MD & Executive Director [62]

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And as you know, for the global business, the employee base is quite redeployable. So 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. So in the short term, you see a margin impact. And over a medium term, we are able to repurpose and redeploy the deployable bench.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [63]

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

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Angan Arun Guha, Wipro Limited - SVP & Global BU Head of BFSI [64]

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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.

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Operator [65]

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The next question is from the line of Abhay Moghe from Bajaj Allianz.

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Abhay Moghe, Bajaj Allianz Life Insurance Company Limited - Research Analyst [66]

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The question is to Abid. It's been almost 4.5 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? Like it's near term, you can see it happening in say, next 2 quarters, 1 year or you think no, it's still some time away and maybe some problems like they're so ingrained that they may take quite a while to resolve. So what's your point of view?

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Abidali Z. Neemuchwala, Wipro Limited - CEO, MD & Executive Director [67]

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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 mention, 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.

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Operator [68]

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The next question is from the line of Girish Pai from Nirmal Bang.

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Girish Pai, Nirmal Bang Securities Pvt. Ltd., Research Division - Head of Research [69]

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I just want to settle back to the margin question. Jatin, are you kind of implying that the 18% to 18.5% is like kind of peak margin? Because you mentioned that whatever savings we're going to get, you're going to reinvest back into the business. So from a 3-year perspective, would the 18.5% be like kind of peak margin that you're going to see?

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Jatin Pravinchandra Dalal, Wipro Limited - CFO [70]

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So it's difficult to call from a 3-year standpoint. Our aspiration certainly would be to go beyond 18% and 18.5% range. My comment was vis-à-vis the fact that, that we had a certain visibility of cost credits and cost benefits that we were able to execute in quarter 2, which we have invested back, some of those may not continue in quarter 3, but we have -- we will execute on other levers for quarter 3. 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. So that's the overall hypothesis with which we're working with, Girish. Difficult to call out specific numbers or ranges beyond that.

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Girish Pai, Nirmal Bang Securities Pvt. Ltd., Research Division - Head of Research [71]

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Okay. My second question is probably a little basic. It's true that the realized INR rate, I believe for many years now Wipro has had a much higher realized rate in INR. What exactly is playing out there? Is it just treasury or what exactly? Why are you getting like INR 1 more than the -- your peers in the market?

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Jatin Pravinchandra Dalal, Wipro Limited - CFO [72]

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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'm unable to compare with others, but we can certainly explain the accounting methodology that we use for our segmental reports.

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Girish Pai, Nirmal Bang Securities Pvt. Ltd., Research Division - Head of Research [73]

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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 are? Jatin, if you want to talk about pricing, how much higher would, say digital services pricing be vis-a-vis your normal on-site pricing?

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Jatin Pravinchandra Dalal, Wipro Limited - CFO [74]

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

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Girish Pai, Nirmal Bang Securities Pvt. Ltd., Research Division - Head of Research [75]

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Let me squeeze one last question in just regarding your order book, order in-flow. In the last few quarters has it been more renewal-type order in-flow that you're getting? Or it's like net new kind of order in-flow?

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Abidali Z. Neemuchwala, Wipro Limited - CEO, MD & Executive Director [76]

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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're starting new projects which is reflected in the revenue guidance that we have given, that is incremental revenue. So those would be new deals.

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Operator [77]

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

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Aparna C. Iyer, Wipro Limited - VP & Corporate Treasurer [78]

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

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Operator [79]

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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.