Hexaware ups revenue guidance to 32% at USD 306 million

Hexaware Tech BSE | NSE 30/05/12 Are Mutual Funds betting on Hexaware Tech?

Atul K Nishar, chairman of Hexaware Technologies joins CNBC-TV18 to give an insight into the company's third quarter results. The company posted revenues at Rs 366 crore against Rs 334.1 crore in the previous quarter. Margins are also up 18.5% this quarter. "We expect to achieve Ebitda margin at 20% in the medium term," Nishar says. Additionally, Hexaware has upped its annual revenue guidance to 32% at USD 306 million.

Below is the edited transcript. Also watch the accompanying video

Q: How much further can your Ebitda margin increase by, how soon can we cross that 20% mark?

A: We believe that lot of levers are still left to utilise to improve the margins further. Of course, with 350 bps in the improvement in margin, it has been very good quarter for us, but last five quarters, every single quarter the margin has gone up. I cannot give guidance exactly for the next quarter, but we feel that over medium-term, if these levers are played well by Hexaware, we should see the margins going up.

Let me just explain the levers; one of course, scaling up itself brings down selling, general and administrative expenses (SG&A). The large deals that Hexaware has been signing, five deals we have already signed, we have several deals over USD 25 million which are in the pipeline, also the pyramid, the fresher-intake which was not there during 2008 and 2009, and we have been adding people so that the bottom of the pyramid is strengthened. That brings down the average cost per employee. Additionally, we have invested heavily into the campus in Chennai and in facilities elsewhere. So general and administrative expenses will not go up much and sales, we will invest more, but we will not go up proportionate to revenue. So we feel overall, there is a potential to improve Ebitda further. I don't know when exactly we will reach at 20% EBITDA, but we will certainly one day reach there.

Q: Given these levers that you spoke about for your margins, what is the target that you are setting out even if you cannot give a timeline would it be 20-25%?

A: If you say 20% EBITDA margin at sometime in the medium-term, it would be a realistic target. I am not saying for Q4, let me clarify again, nor am I saying clearly for which quarter.

Q: One thing which stood out this quarter has been the volume growth of 9.2% in a sequential basis. Can we extrapolate that and what exactly is happening with regards to the client environment at this point?

A: Every single quarter, we have been seeing volume growth. This time, of course, volume growth has coupled with strong increase in the offshore percentage. We have been cautiously pushing our onsite revenue to offshore, showing benefits to the clients as a result also improving our margins. So this time has been strong move of more than 3% towards offshore. So we are at 46.3% offshore percentage now, our aim is of course higher, but it will take time.

So volume growth will sustain over a period of time, and the fact that we had better pricing in both onsite and offshore this quarter speaks enough about the environment that we see with our clients. Talking about the future environment, I will leave the discussion on global environment to media. But talking about what we hear from our clients gives us lot of confidence.

We have not seen any project cancellation at all, we have seen good visibility in terms of pipeline, we see around four 25 million deals. So we feel this growth momentum that we have seen, which is also reflected in our increasing the guidance for the year to 32% growth over last year, we feel the momentum will sustain for a longer period of time.

Q: After the 32% growth this time around, could we up this guidance further, and what are you projecting at this point in time for CY12?

A: Next quarter being our last quarter, there is no question of guidance going up, USD 306 million is what we have given as the overall annual guidance. Coming to 2012, we are pretty confident that we would have above industry average growth rate, and whatever estimate you have from NASSCOM for the whole industry, we would have a fairly higher growth than that. While I cannot give exact numbers, we are pretty confident looking at the pipeline, looking at the large deals and looking at the visibility that we have as on today.

Q: This guidance which have increased to 32% what is it predicated on?

A: Firstly, the five large deals that we have signed during the last five quarters, that ramp up is certainly reflected in the revenue, but some of that ramp up is not fully been factored in. We would see ongoing ramp up over next few quarters as well. Even when we announced the USD 177 million deal, we had said that it will take six-seven quarters to fully ramp up to that level that we have agreed upon with the client, and some more large deal that we expect to sign should give very good visibility in terms of what we believe can be the revenue each quarter.

Q: What's the pricing environment like? You have already managed to see some sort of pricing improvement in both offshore and onshore this quarter, is it possible to extract more pricing improvement or it's likely to remain stable and capped at these levels?

A: I would say that pricing broadly will be stable. We do not expect pricing to go down. Even if there is a marginal improvement, I don't want to harp on that too much. We do not see any material downward trend in terms of pricing environment and as you see our pricing as it is healthy, our average rate onsite is USD 72.5 and the average rate off shore is USD 23. So in comparative terms, this is healthy enough and that should sustain I would say.

Q: Give us a sense of what you did in terms of client mix this time. We understand you won 12 new clients. Also in terms of a possible geographical breakup, where exactly did you see the most traction coming in from?

A: Yes this quarter we won six new clients from Asia Pacific Economic Cooperation (APEC) region, four clients from North America and two clients from Europe. In terms of competencies, it was well spread out. Of course our single largest door opener is ERP so we won 5 clients there. We also won clients in testing, transportation and BFSI too. The environment so far is not coming in the way of wining new clients there.

So actually this is one time where all the clients have been won only in our strong competency areas.

Q: Given that rupee has depreciated so much what's the expectation of what the EPS growth might be for Hexaware in this calendar year?

A: It's a very important point. While the rupee has depreciated by 9% in this quarter, what is reflected in this result is only 4% depreciation because we take average of the 3 months, last day of the 3 months. So if rupee remains at this level as we see today, then we are yet to capture the balance in our margin.

In terms of forex impact, we are substantially hedged for the four quarters and about 50% hedge for the following four quarters. Our hedging rate is about Rs 48, and euro is just above Rs 70. So I would say we will see the lower rupee helping improve our EBIT and EBITDA margin at the gross level, where as at the forex level we don't know yet - there can be profit, there can be loss.

Q: And to this 340 basis point margin improvement, what has been the contribution of rupee?

A: In this quarter about 1.5% is the impact.