Moneycontrol » News » Business » Earnings

Margins to remain intact in near-term: HCL

Published on Mon, Aug 04, 2008 at 10:50 | Source : CNBC-TV18

Updated at Tue, Aug 05, 2008 at 19:14

33144 Investors following HCL Tech. Share this News with them.

Share on Tumblr

ALSO READ

HCL Tech

BSE | NSE 25/05/12

Are Mutual Funds betting on HCL Tech?

HCL Technologies has announced its fourth quarter results. The company's Q4 net loss at Rs 13.5 crore. Its net sales were at Rs 1,108 crore.

The Company's Management including Shiv Nadar , Chairman & Chief Strategy Officer, HCL , Vineet Nayar , CEO, Ranjit Narasimhan , President & Head of HCL BPO Operations and Anil Chanana , EVP Finance spoke in an exclusive interview with CNBC-TV18.

The Management expects margins to remain intact in near-term. The company has seen market-to-market loss of USD69.7 million. HCL has USD66 million of cash surplus as of June-end.

The operating side of business is quite robust, the Management said. It feels that the US environment is bad for financial services and consumer sectors. The company is seeing its impact. The US response to slowdown has been to outsource more, he said.

Excerpts from CNBC-TV18's exclusive interview with Vineet Nayar:

Q: How much of your operating numbers that are good for this quarter will be weighed down by the foreign exchange front, which has been a bit of a problem area for you?

Chanana: If you look at the numbers this quarter there has been a loss of USD69.7 million, which were basically mark-to-market (MTM) losses. We have been taking forward covers to hedge our business against currency fluctuations and we do it because we have long-term annuity contracts in our portfolio. You can look at the pros and cons of hedging over a period of time. So if you look at the books of accounts and the accounting impact, take three-year period-year one which is FY06 we were negative 7 million, year two FY07 we were positive USD 79 million and this year again we are negative. Taken an impact of over three years, we are half a million positive.

If you look how much it is adding to the cash flows, consider what my numbers would have been had I not taken these covers. As of March, if I take the last four quarters, I had accumulated cash surplus of something like USD 72 million. This is comparing the spot rates what I realized by taking the forward covers and for this quarter April to June I had decided to unhedge some of my positions of USD 540 million, I gave the treasury people a leeway to use about 10%-12% of that accumulated cash surplus they had generated and unhedge the position. So there was a cash loss of USD 9 million, which got incurred and in the end as of June 30, we have about USD 66 million still as a cash surplus, which is with us.

So you have to look at it over a long period of time, accounting wise we are positive, cash flow wise we are positive.

Q: Do you see more unwinding of hedges going forward, which might result in more cash losses?

Chanana: This is a policy that you take a view based on the advice of the various advisors, so in this quarter our advisors said the rupee has depreciated by 1% in the month of April, it has depreciated by something like 7.2% in the month of May and reaches somewhere like Rs 43.20 to a dollar and there could be a further depreciation of 3-5%. If we could have reached Rs 45 to a dollar, I would have incurred another loss of USD 22 million. It is like a stop-loss position; so they take forward covers and cancellation of forward covers and both go hand in hand, it is part of the overall treasury policy.

Q: Revenue growth seems to be quite robust, right now you are on track with the annual guidance that you have been holding out?

Nayar: I think two years in a row we have hit quite a good number - about 55% last year and 35.2% this year. If we take the last nine quarters, on QoQ basis, it is also growing at quite a healthy state. Two years in the row we have shown margin expansions. So as you rightly said, the operating side of our business is quite robust.

We have stopped giving guidance since 2004 then we came up with a very uncertain environment in 2007-08 and guided the street at 35% growth predominantly because we wanted to make sure that the Street understands that as a management we are robust about our growth prospective and going back to our 2004 policy of no guidance going forward. Having said that with a billion dollars of order book that we signed last year, which is about twice compared to what was the year before with 9-10 quarters of significant growth in revenues and operating income, the future is quite bright for HCL.

Q: How are you reading the environment right now because there have been some difficulties on the BFSI (Banks, Financial Services & Insurance) space for you as a company made up by some of the other verticals that you operate in. Would you classify it as a sticky environment particularly in the US or things are not as bad as made out to be?

Nayar: The environment in US is quite bad and it is bad for financial services sector and it is also bad for a lot of consumer facing sectors like retail and we are seeing that impact. However what happened in the last four quarters is that we were surprised that the response of US was to outsource and run the business in a big way. So if one sees HCL Technologies for e.g. our US, Europe growth both is around 34-35% year on year and the BFSI for HCL is grown by about 44% YoY indicating to the fact that the US response to slowdown has been to outsource higher amount in run the business.

HCL because of our 'Blue Ocean Strategy,' focused on running the business, which is a combination of infrastructure management and application operations and that augurs well with what the market is wanting to do today - which is cut down the expending and run the business. So it was a sweet spot for HCL and therefore we are seeing the growth for us in financial segments and in US both. But overall environment in US is negative; impact on HCL seems to be so far positive.

Q: There has been some talk that you are undergoing a change of strategy in the infrastructure management business, which could slow things for a bit. Could you elaborate on that and what the expected impact is there?

Nayar: We are undergoing a change in infrastructure strategy, which is in two folds. One is we want to reduce the momentum of the impact to material in that business. Another thing is that two years from now, infrastructure services should have renovated itself into a completely different offering-which at this juncture I am not willing to share-which will be ahead of the market.

You must understand that this year we will be rated number one in the world. This is the first time any Indian IT services company has been rated number one in the world in anything and Black Book of Outsourcing has rated us number one in infrastructure management.

So our goal is that in two years time, you will see the impact twelve months from now to rejig the infrastructure management services completely to take it into a new trajectory of growth.

Having said that, I did not say that infrastructure momentum in the next 24 months will slow down, it will not. I said that there are new strategies in play in infrastructure, a new market we wanted to define using infrastructure management, so that it sustains the growth, which it is already continuing.

Q: What about BPO. How was this quarter and what's the outlook? You had a fairly sideways kind of quarter this time?

Narasimhan: The revenue growth of BPO (Business Process Outsourcing) during last year was 21%, which is lower than the aggressive rates of growth we have had in the last couple of years. If one takes a slightly larger span of time, over five years, our BPO has grown by 50% CAGR (Compound Annual Growth Rate) in the five years including last year and profit has grown by 131% CAGR.

Last year we took a conscious decision to break away from linear monotonic growth and to create a sustainable model for a sustaining profit. Consequently we re-architected the entire business; we decided to focus on platform base services, to focus on output base pricing from input base pricing and completely delink the growth in revenue from growth in manpower and we will get back to normal rates during this year. The consequences of the change in strategy will be visible in the coming quarters.

Q: The margins have improved between quarters, so do you see it stabilising here for the remaining quarters of the year?

Chanana: We has seen five quarters consecutively in a row, we have demonstrated margin expansion, the utilization have gone higher. But in terms of guidance you have to excuse us.

Nadar: In the next near-term the margins will remain in tact; there is no worry on the margins.

Q: Why are you going back to the old format of not giving guidance, is it because you expect some volatility in earnings over the next few quarters, which you cannot map right now or for some other reason?

Nayar: Irrespective of what we do there will be a counter point to that. In 2004 when we took decision of no guidance, the reason for that was largely because we wanted to focus in business not begin to govern by what the guidance is being given and invest into business. Also there is a significant investment, which has to be made in the business to change the territory of the business away from manpower based pricing, India centricity, offshore bill rate or onshore bill rate and from utilization, all these matrixes, which we are using for these businesses have to become irrelevant because all these are heading South, they are not heading North. Now to do that it is very essential for the management to focus on and invest in business whether they are meeting quarterly or yearly guidelines and demonstrate the markets that you can grow faster than everybody else by investing in business, which is what we did over the last ten quarters or two years, whichever way you want to look at it.

In 2007-08, the environment became so volatile that the uncertainties were very high, so we broke that promise to ourselves and came in because we did not see a drop in business in HCL. We saw volatility in the market space, uncertainty, we were cautiously optimistic and so we came up with the guidance of 35%. Therefore, having demonstrated 10 quarters in a row, 2 years of operating gains and the fact that we are growing faster than anyone in the industry. It is time for us to go back into investment and get more concerned about delivering annual results, which are best in class and changing the business model, so that we can sustain our growth beyond 2010, when utilization, manpower cost, India advantage, dollar rupee fluctuation all these will become big concerns. So therefore there is a significant investment, we have to make our 2010 to 2015 really robust that is what we are focused on.

Q: Give us a word on how you plan to approach the HCL Tech investor fraternity and the stock. Some of your peers, albeit smaller ones have resorted to buybacks because of their low stock price. Do you have anything like that in mind and you have got amongst your peers the highest dividend payout at 6%, do you think you can hold on to such high dividend payouts given the investment that Vineet Nayar just spoke about?

Nadar: The answer is yes, the operational net cash flow is more or less equal to EBIT. If you track the EBIT ratio of the last four years, it will be more or less the same as the cash flow, which would have taken place. Last year, our operational cash flow as a matter of fact grew up by a sturdy 39.5% in excess of USD 360 million. So we have plenty of room at this level to distribute as dividends. So we have computed the next three years on expected growth, this level of dividend looks perfectly in order and as in continuation of whatever dividend policy that we have been following over the last twenty-two quarters. So yes, it is very sustainable.

Regarding buyback of shares, our company does not intend to buyback the shares because of the peculiar nature of the share construct of our company. There is a single promoter who has a very large shareholding.

Then buying back will concentrate more shares in one hand and also will reduce the liquidity. That is the reason why decided not to told.