ET Now: What do you want to start with -- Europe or BFSI?
BG Srinivas: The overall financial service sector in the last quarter has turned for the positive, particularly banking and capital markets. They posted their last quarter results in the US, Europe. There is definitely a turn for the better in terms of their own performance. However, there is a lot of focus on cost optimisation because when the revenue upside is a challenge, everybody is focusing on driving efficiencies and that is something which we continue to see not only in the last quarter or the last couple of quarters, but we will continue to see that actions in the future as well.
But in terms of spending, further vendor consolidation is happening both in Europe as well as in the US. We are seeing discretionary spends, though it is not broad-based, selectively going into client-specific applications and it will take the multi channels. The digital transformation is big on the agenda for both banking and capital markets. We are also seeing spends, particularly in the risk and compliance areas. These are the three distinct areas where we are participating and particularly when it comes to vendor consolidation, obviously we need to be on the right side. So as more and more vendor consolidation efforts happen, there is definitely a cost squeeze, but the revenue volume uptick will be there if you continue to win those deals.
So these are our focus areas. We have also added some new accounts in the sector, both in Europe and the US as well as in the rest of the world, which has also given us some uptick in revenue growth. We had a couple of large deal wins in the last quarter. We have seen deal activity, particularly in Europe, open up in the Nordics for financial services. Benelux has always been strong for us, and the UK and the US continue to be strong. We work with some of the largest banks in Australia as well and we have done reasonably well.
ET Now: Rajiv, the deal pipeline has picked up, growth momentum is back, the rupee was a strong tailwind, but margins have been flat even if I knock off all the extraordinary?
Rajiv Bansal: We did say in our earnings call in July that we are giving wage hikes effective July for our offshore folks at 8%. We have given at about 3% and we gave wage hikes for our sales folks effective May which was 8%. So if we look at the impact of all that we clearly articulated that it is going to have a 300 bps impact on our margins for the current quarter. If you look at the rupee depreciation over the last one quarter on average basis, 11% which has given an uptick of about 250 bps on the margin, but it has been negated by 300 bps impact because of wage hikes. So with that exercise I think the expectations were very clearly set. We clearly articulated how wage hikes would pan out over the next two quarters and what the impact is going to be.
ET Now: Rajiv, last time you told me that the margin trajectory had bottomed out. But now has the uptick also started there?
Rajiv Bansal: No, we are in the investment phase right now and if you look at the last couple of quarters we have seen volatile growth. What we have articulated in the last four-five months is clearly that we have to invest in the business, be it sales engine, sales effectiveness, we have to invest in product quality tools, and also at the same time we look at our cost and we are driving a cost optimization initiative. The fact is that these are the investments that we have to make to sustain a high quality growth, higher growth at good margin.
During the initial phase of the journey you would see the margins getting impacted because of investment depending on in which quarter you make the investment. But as long as the investments are happening, you have a clear plan of how those returns will come from the investment, and how it secures your future. So I am not too worried about the margins or how the margins would pan out over the next one or two quarters. The important thing is to make the investment and still make the margins and that is what we are doing right now.
So if you look at the last three quarters, our operating margins have been flat at 23.5% and that is a good sign because in spite of the rupee depreciating or appreciating, we have kept our margin profile at about 23.5% for the last three quarters. We are investing the money back into business. If you are seeing an uptick, that has gone in terms of employee wage hikes. We are paying our employees better bonuses, we are investing in sales, we are hiring new sales people. We are looking at growth markets.
ET Now: Shibu just told us that Q3 and Q4 are going to be soft quarters for the company if the environment is going to be slightly soft. There are too many holidays, what happens to margins?
Rajiv Bansal: Margins will depend on how the growth is because if the growth comes down, I cannot cut my calls.
ET Now: So far growth is coming back, so that is not a worry?
Rajiv Bansal: As your question was if the growth does not come, then what happens to the margins? So to a large extent almost all your calls are fixed for the current quarter because these are wage costs. I cannot cut salaries just because I do not see growth. So a lot of margins would depend on the growth coming back, but these are soft quarters and it is true because there are lesser working days, we would always have an overhang of client shutdowns, holiday season. So to that extent I am not worried about quarter on quarter margins at this moment. I am more focused about what my rate of margins is going to be this financial year and how that will play out for the next financial year.
To get the growth back, we have to invest, we have to get the employee moral up, get the attrition levels down, have a very effective sales engine, investment quality and productivity -- those are the important things for this year. If we are able to do all of that, the next key year would look much better for us.
ET Now: So when will this growth come back? Will it come back in the first half of the next financial year or the second half of next financial year?
BG Srinivas: If we compare with last year, we are already on upward growth trajectory and we are internally making all efforts to sustain that growth momentum. Notwithstanding any new shocks in the market environment, we would continue to focus on driving this growth momentum into not only next two quarters but also our plans for the next year. So we are not letting go on the focus on growth for sure and this is across all sectors, across all service lines.
We are also investing a lot in our new growth engines, which is product platforms, cloud, enterprise mobility analytics. So our strategy is very focused on driving quality growth. If both the largest markets -- Europe and the US -- continue to remain stable and we have a better idea when the budgets for our clients are cast in the month of January, we would be able to give you a better idea of how the next year would pan out.
ET Now: Rajiv, you have taken a big charge of about 220 crore. Tell me more about that?
Rajiv Bansal: No, if you look at our note in the financials, it is very clearly articulated. We are in discussions with the US Attorney office and other departments for civil settlement and based on our assessment and based on the discussion that we have, we felt it is important to take a charge over $35 million and we have taken a charge. A lot of details are there in the notes to accounts if you look at it. There is nothing more to say at this point of time.
ET Now: But is a strong currency environment helping you to take slightly bigger leap because you have a little bit of more elbow room and a lot of flexibility?
Rajiv Bansal: Absolutely, if you look at it, it helped us give a wage hike this quarter and also in making the investment that we need to make in the sales engine. This definitely gives you some elbow room. But also you have to understand that any volatile currency is not good in the long run, it is not good for anyone in the country and especially for us too because a lot of this rupee depreciation also impacts on a non-operating income because most of our cash balances are in the banks and I lose interest in dollar terms.
So a lot of the operating benefit that I get, operating margins benefit that I see, actually gets negated to some extent by the drop in interest in dollar terms. Also, this kind of volatility it is very difficult to manage and take an effective hedge and we have seen exchange losses of about $14-$15 million this quarter. So a lot of the benefit that you see goes negated if the rupee is very volatile, but definitely if the rupee remains stable and it remains at this level, it gives you a lot of elbow room.
ET Now: The dividend what you have announced today with your Q2 numbers is that in line with your dividend policy?
Rajiv Bansal: It is in line with the policy. As of now the dividend policy remains the same, we will pay up to 30% of our profits and we are paying according to that policy.
ET Now: BG, What is one factor which is giving you sleepless nights? Last time you were having a lot of sleepless nights. I am sure the numbers of sleepless nights this time around are less?
BG Srinivas: If you look at the macro, definitely there is a fair degree of stability. So that is definitely not our concern. A couple of things which could impact us include: the immigration bill which is stabled in the US, that is something may not be a quarterly phenomena but that we are looking, waiting for that outcome. There are some short-term challenges which are more to do with the client contacts which we have already mentioned furloughs and holidays otherwise we are not seeing anything major at this point in time.
ET Now: Just a one word answer if the overall confidence about your business environment was let us say 5 out of 10 after Q1 numbers, has that gone to 7 or 8 number?
Rajiv Bansal: Seven.
ET Now: Seven, not nine?
Rajiv Bansal: You asked me one word answer. So I gave you a one word answer.
ET Now: Okay I will take seven. Five has become seven, which is encouraging. Would you say seven or would you say eigth?
BG Srinivas: Seven.
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