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By Swami Shanmugasundaram, CFA | 11-08-2010 02:14 PM

Wipro: Offshoring Has Become Mainstream

Demand for offshoring services should remain strong in good times and bad, according to Wipro's CFO of international operations, Sridhar Ramasubbu.

Swami Shanmugasundaram: Hello, my name is Swami Shanmugasundaram. I'm an equity analyst covering IT Services companies. I'm happy to have with me today, Wipro's CFO of International Operations, Sridhar Ramasubbu. Sridhar is here to present at our 2010 Stock Conference and agreed to do a short interview. Thanks for joining us today Sridhar.

Sridhar Ramasubbu: Thanks, Swami. Good to see you.

Shanmugasundaram: I think first question, if you look at over the last few quarters, market witnessed strong performance from IT services companies and Wipro is no exception. You're looking at high single-digit, low double-digit revenue growth rates and most of it was due to pent-up demand. Companies cut their expenses in 2009 but then came back strongly in 2010. So, what do you think will happen as we get into 2011? Do you think you would be able to sustain this growth rates?

Ramasubbu: Overall, if you look at, Swami, there is a good demand. Even during recession, the deal flow towards offshore had not stopped. So we did win about more than 12 large deals last year and the deal flow continues to be there towards offshore today.

If you look at the three main sectors which is the financial sector, the enterprise sector, and the technology sector, everybody is hurting and they wanted to save money to the bottom line. So I think, even in the large deals, if you look at the renewals which are coming up, which are about 12 large deals which are multi-billion dollar renewals, the customers are so become comfortable with the offshoring, offshoring has become mainstream now, and what they're doing is they're carving out a part of their renewal deal into offshore and then applying the offshore package to that. And obviously, the people who are in the race are the top three vendors from India and that includes Wipro. So we are there in seven out of the 10 deals today. I'm very, very hopeful that as we move along, the demand will continue to sustain.

The other part of it is if you're looking at the budgets, the budget has not frozen as of now and the budgets, I don't think, it will be majorly different from what we saw in 2010. There could be a little bit of upward bias but not sure it's going to really matter as well because the market – the opportunities space is so large and we have more than $1 trillion of opportunity which is lying within captive.

On the one side is, what we fight for market share with all our peers, the other side is the captive market and we address both of them. So, I think the demand is quite strong.

Shanmugasundaram: So now, going with the demand which is good for your top line, so it also led to a spike in the attrition and wage inflation which ultimately would impact your bottom line. So, could you talk about the steps that you guys have taken to protect your margin levels and how do you think you could address that going forward, if say attrition or wage inflation remains at the current level?

Ramasubbu: Sure. It's a good question. If you look at the attrition as well as the wage cost per se, what we do – attrition is out of the day, when the demand picks up, there are lots of demand in the people and some amount of lateral movement happens within the peers, but it's not new to us. We have seen that happening in 2003 when the market came back, we saw that happening in tech boom days with '98, '99, we've been able to manage that very well.

If you look at 2003, 2004 onwards, we have seen slowly the wage costs going up from 10% to 12% to 15% and our margins did not majorly drop. The reason for that is if you look at what we do in Wipro, we have a big pyramid, right. We have from senior people to the freshers and we started about four, five years back to get more freshers into the organization. We were at one point in time, 30% of our population were freshers as compared to some of the competition which had more than 65%, 70%. So, we moved the meter and we are close to 48%, 50% today freshers, that is one to three-year population.

So, the way we look at is, one is the wage inflation, which we had to be at the market to get the right talent. The other is the wage cost per person. We sort of measured two things, one is, what is the wage cost as a part of our percentage of revenue, which remains at 48% to 49% band and the wage cost per person even after giving 15% or 12% whatever the market demands, we always maintain that the wage cost per person does not change majorly. So, with proper control and measure on these two performances, we think that we can continue to look at the margins what you're looking at, and also there are other levers which we can certainly use like FPP, more work off-shore, better utilization, and so on and so forth which will help us to sustain the margin at the current level.

Shanmugasundaram: So, talking about margins, one of the other thing is companies are talking about nonlinear growth. So, I know Wipro is definitely one of the bigger things because that you guys were talking about 8% or 9% of the revenue coming out of that thing. So, do you have any long-term targets on that? How do the companies look at when you say, okay, now it's not going to be based on per person who's working on the project, but it's going to be based on the deliverables that you're going to do, is the reception good so far or how does it work?

Ramasubbu: I would say that Wipro has been a pioneer in this. Three years back, when you looked at the overall scenario when the demand was – just before the recession, we found ourselves that if we have to continue to grow on this, we will shortly be across 200,000 people, we had 115,000 people today, and at 225,000 people the model is still more people, more revenue. So, what we did was, we consciously created a group in a very structured way.

So, what do we get, how do we measure these nonlinear initiatives, we started using factory model, frameworks, managed services, fixed-price projects, reusable IPs and so on and so forth and we've been able to set ourselves a target of we should be 15% of our revenues should come from nonlinear initiatives in three years time. First year we did 5%, last year we did 8.7%, as of this quarter, last quarter we had 11.5%. So we are right on the target in terms of reaching that 15% range by end of this year.

So one way of measuring that is we should get about 5% more revenue for those nonlinear initiatives than the standard rates. So combined with this reusable frameworks and FPP and the factory model managed services with this price augmentation what you are talking about. We have been able to successfully move the meter to the current percentage what we have and we have been pretty successful on that.

Shanmugasundaram: The other question is related to the competitive landscape. So if you look out at four years, say 2003, 2004 none of the global players had a major presence in India. Now if you look at it, Accenture is there, IBM is there, HP is there, Capgemini is there. So how did that change the competitive landscapes and going forward do you think it's going to be like this or are you kind of looking at more consolidations and ending up with very few players in the market?

Ramasubbu: Good question. So what we have seen is that the big players, the global companies moving to India has just validated our model. We've been telling that this model is a good model. This model is good in good and bad times and now with so many people are opting offshore validated our model, number one.

Number two, despite their presence of three year, four years in India, they are not able to have the flexibility in terms of and also the cost levers the way we manage, they are not able to manage. In fact, I was told that before these companies went to India, they were running close to $23,000 per person per year profit, but whereas that has come down to $17,500. Whereas our offshore people we are about $12,500, we moved the meter to $13,000. There will be a meeting ground. The meeting ground seems to be to our advantage rather than to their advantage. Their main reason of going to offshore is to have a control on the cost, but that doesn't seem to be happening. Number two, is when these companies are going – are trying to do more of their internal work.

Then the third thing is they are still not unbundling the contract in front of the customers. So they go and get a fixed price contract and they internally decide what has to be done implemented in India and what has to be done by the consultants and partners in the U.S. or elsewhere. So that model has got some amount of success for them, they have got huge ramp up in India. There are two good things have happened for them is that they are trying to shift their G&A cost to India, their bench is being maintained in India but are they penetrating into our market? Are they taking an offshore market? That's yet to be seen.

Shanmugasundaram: I think lastly, could you talk about the headwinds and tailwinds that you see over the next few quarters and the next two, three years?

Ramasubbu: Sure. I think as far as the demand is concerned, we discussed that there is very good demand for offshore and we've also proved in two recessions, both in 2001 and 2007-2008 that this model works both in good and bad times. So the external situation will not majorly deter us from taking market share given the market situation outside, whether it's good or bad times.

Having said that, I think the Indian competition is becoming tougher and tougher. So there is a very close mapping of between Indian competition in terms of taking market share here. You'll always see one company going up, one company lagging behind, but over a period of three years to five years time, I think each one of us will do in their own way, in a progressive way.

The third this is the advantage what Wipro has got. If you look at Wipro, none of the Indian competition has got the broadest portfolio of services like what we have. We have today 26% of our revenues coming from the financial sector, we have 27% coming from technology and the balance coming from enterprise.

If you do the service line, 65% of the service which is the package implementation, infrastructure services, BPO, testing, they all come from that thing. So whether you cut it vertically, you cut it horizontally. And also the alliance, strong alliance partnership which we have with Microsoft, Cisco and EMC is giving a 360 degree advantage for us in terms of taking the relationship forward.

Even in the geography wise, if you look at it, 56% of our revenues come from America, 26% comes from Europe, 10% comes from India and Middle East, about 7.5%, 8% comes from APAC, 3% from rest of the world. So whether you cut it, slice and dice the issue, the market, vertically, horizontally or in terms of strategic alliances or in terms of geographies, we are spread across all the geographies.

Two years, three years back, we had more centers in India, today we have centers outside India more than what we have in India. Today we are operating in 54 countries and the new – this thing is that – we are looking at the country structure where are picking up certain countries like Germany, France, LatAm region, China and trying to develop our services there and we are also looking very actively in the entire Africa and the APAC region. So I think we are very well positioned in terms of on a long-term basis to take the dollar either it's a captive industry, either it is a geography or it's service lines or the verticals.

Shanmugasundaram: Thanks for your insights and thanks again for joining us today.

Ramasubbu: Thank you, Swami. I enjoyed the conversation.


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