HCL Technologies' margins in the medium-term will be in the 18-19 percent range, CFO Anil Chanana said on Wednesday.
The company surprised the street once again, with a better-than-expected third quarter net profit of Rs 1,040 crore, up 73 percent year-on-year, while revenue rose 23 percent to Rs 6,425 crore.
Analysts on average had expected HCL Tech to report a net profit of Rs 931 crore on sales of Rs 6,413 crore.
Its EBIT margin came in at 19.9 percent (15.7 percent in Q3, 2012), while EBITDA margin was at 22.4 percent (18.4 percent a year ago).
HCL Tech will invest those gains in the rebid market, where market opportunity is expected to remain strong, at least till the end of calendar 2014.
"We continue to see great wins over there and therefore given that the market momentum is there, we will continue to aggressively play there," Anant Gupta, CEO, told CNBC-TV18.
Below is the verbatim transcript of their interview on CNBC-TV18
Q: Once again the company has surprised the street positively with its margins. It has been six straight consecutive quarters of margin improvement. You earlier said that EBIT margins will be maintained at 18-19 percent, but this quarter you have managed to inch towards 20 percent. Is there a case for margins to reset higher, closer to 20 percent?
Chanana: It has been a consistent margin story so this is a sixth straight quarter of margin expansion and net income expansion. We gave guidance to some of our investors who asked what the company is targeting as a medium-term range of margins. So, that range continues to be between 18-19 percent. We are focused on investing in our business so it could vary from quarter to quarter.
Q: In the last 12 months, the company has managed to grow dollar revenues by 15 percent. Will FY14 growth rate be faster?
Gupta: It is important to understand from where we are getting this growth. We have a broad base portfolio and are not overtly dependent on a specific business mix which is discretionary, non-discretionary, specific verticals or geographies. What has been growing well for us is the entire uptrend in the market, which is skewed towards non-discretionary spend.
If you look at that non-discretionary spend, the tax and prices index (TPI) data or the information services group (ISG) data, calendar year ’13-14-15 continue to be a very large portfolio with respect to rebid and restructured the deals and that has been an area where HCL had invested earlier. We continue to see great wins over there and therefore, given the market momentum is there, we will continue to aggressively play in there.
So, whatever margin upside we are getting from the operations, we are deploying it back into investments in these specific areas. This is because we see that this is a window of opportunity for us to acquire and put our foot into the door in terms of marquee customers. Therefore, expand that with higher value services when the time is right. We will continue to invest into the market more aggressively than earlier because the market is pretty much there.
Q: The other worries like utilisations at a very high level, at 83-84 percent now; are these sustainable levels or might taper off and thereby back margins?
Gupta: The important thing we should realise is that in the industry and especially with respect to HCL services, the mix of services is changing. So, while utilisation is an important matrix for measurement, we at HCL have been driving a lot more non-linearity between our revenue and the headcount, which is there. It varies from service line to service line. For example, in engineering services it will be based more on risk reward, if it is Enterprise Application Services (EAS) it is based around intellectual property (IPs) and templates for enterprise resource planning (ERP) rollouts consolidation over there and likewise in other service line.
From utilisation perspective, we are at a point where we believe it is optimal and depending on the mix of service portfolio this is the range we would be, unless we see some extremely significant shift in any other specific service line.
Q: Banking, financial services & insurance (BFSI) growth flattened out this quarter. In the past few quarters, HCL Tech has managed to grow its BFSI portfolio much better than couple of its peers. However, this quarter you just managed to grow it at sub-1 percent, what is the reason?
Gupta: We do not look at a vertical or a service line based on quarter-on-quarter performance. So, if you look at financial services, they grew in double digits the previous quarter and more than 4 percent in the quarter before. Therefore, we look at all our services whether services, verticals or geography performance based on a longer trend and not on QoQ performance. We continue to see that market, that sector bullish. We continue to see consolidation and churn in that market as well.
Q: Infra Management Services (IMS) have been growing at a run rate of about 10 percent for the last few quarters. Is it sustainable? What kind of deal wins and traction are you seeing in the IMS space?
Gupta: The market and the momentum are there. Our funnels are 40 percent up in the same period last year. I see no reason why we would not continue to drive the growth in the rebid market in that fashion. We will have to wait and watch as to what real QoQ performances will be in that sector.
Q: According to some industry leaders, deal pipeline is better in FY14 than FY13. Can this USD 1-1.5 billion deal win run rate continue?
Gupta: If you have read the latest ISG data on that, from an overall calendar year 13 perspective, the rebid market continues to look good. There are spots of discretionary spend also emerging. These decisions will be more skewed towards H2 and this is based on the data points that we get from TPI or ISG.
If you look at the overall calendar year, I still think that the business is there. The decisions are need to be taken, given that these are rebid and restructured engagements. So, I would not look at a quarter’s performance to see how that is delivering, but from a booking profile we booked over a billion dollars this quarter and will continue to invest in that market place assuming the decisions will happen.
Q: In the press conference, you indicated that the deal renewal market opportunity is strong till calendar 2014. What happens thereafter? Are you skeptical of 2015?
Gupta: If you look at the overall restructured market, it is close to USD 116 billion odd and therefore, the rebid between calendar year 14-16 is a significant amount. As long as non-discretionary side is concerned, there is already a market play. The concern is around the spending and discretionary areas and for that, we still do not see any signs, anything that is pointing towards a significant uptick in trend. There are pieces of discretionary spend, smaller projects in there, but getting them converted into large scale programs is something for which we have not yet got any signals or trend in the market to say, yes that is back on the table.
Q: While the IMS has been doing very well, it is the core software growth that continues to be fairly tepid. Any indications of when we could see an improvement in the core software traction?
Chanana: In the last 12 months ending March 31, 2013, our growth in the software services segment has been above 9 percent which is in the upper quadrant of the industry growth in that side.