Confident of outperforming IT industry in 2013: Hexaware

Moneycontrol Bureau

Software services provider Hexaware Technologies, which earlier this month lowered its guidance for the fourth quarter, is still "reasonably confident" it will outperform the wider industry in 2013, its  chairman Atul Nishar said on Tuesday. The company had cut its fourth quarter revenue guidance to USD 92 million from USD 94.7-96.5 million, citing changes to a project plan for a customer and impact on account of hurricane Sandy, which devastated the US east coast last month. With the revision in revenue outlook and continued investments made for the medium term, there would be an impact on profit margins, it had added. Nishar told CNBC-TV18 that the company's margins will be hit by 5-7 percent in the fourth quarter, but said that the relationship with the concerned client remained intact and the project also continued. "This is a large client, one of our top 10 clients and we are doing multiple projects as a part of this large engagement. In one of the projects with this client there is replanning which was not foreseen earlier and the project continues but because of the replanning the current quarter revenue has been adversely impacted...I would like to assure that the relationship with that client remains very solid, there is no change there. There are multiple projects which are all going extremely well and this particular change in the plan is nothing to do with any delivery issue but more on a broader perspective of what the client wanted to do," he said. Nishar said the worst will be over the company in the fourth quarter and margins will improve from the Jan-March quarter. He further added that the growth trajectory remained on track despite challenging environment, although growth rates could vary. In 2012, the company is expected to grow 18 percent, according to him. Industry body NASSCOM expects the IT services sector will meet the lower end of its 11-14 percent growth guidance for FY13. Several analysts have downgraded Hexaware since the company's guidance cut announcement. Portugese investment bank Espirito Santo, for instance, has urged investors "sell" the stock. "Outside the new deals announced in Q2 and Q3 CY12, which will contribute 8% incremental growth in CY13, our concerns are more about the ability to generate growth from existing clients, rather than its ability to win new deals. We now expect Hexaware's CY13 growth to be in low double digits at best," analysts Soumitra Chatterjee and Nitin Padmanabhan said. Nomura and Macquarie too downgraded the stock to "neutral" and "underperform" respectively. Hexaware shares were up 0.5 percent at Rs 87.50 on NSE.  The stock is down over 18 percent since the announcement was made on Dec 7.

Click on next page for Nishar's interview to CNBC-TV18.
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Q: You have spoken about stoppage of work on a USD 60 million project. What exactly led to this problem? A: We are doing multiple projects as a part of a large engagement with one of our top ten clients. In one of the projects with this client, there is re-planning which was not foreseen. The project still continues, but because of the re-planning, the current quarter revenue has been adversely impacted. To what extent this project will impact the future quarters, we have not been able to guide that clearly. We will know for sure in January, but as soon as we got to know that in this quarter the revenue is going to fall, we thought it was prudent and the governance demanded that we informed the investors clearly. However, since we will be missing certain revenue for which we are continuing to invest, continuing to have people working on even through this quarter; the margins would get impacted and that is what we have guided by almost 5-7 percent in this quarter. However, I would like to assure that the relationship with that client remains very solid, there is no change there. There are multiple projects which are all going extremely well and this particular change in the plan has nothing to do with any delivery issue, but more on a broader perspective of what the client wanted to do. Q: Some of the analysts who track your company, post this communication have brought down your FY13 growth estimates in revenue to single digits; even to 8-9 percent. Is that over-stating the case? Or do you think it could come to that? A: We are in the process of planning for 2013 so I will not be able to guide for 2013 at this point. However, we at Hexaware Technologies remain reasonably confident, fairly optimistic that while the process is on, I can say that we would outperform the industry growth rate. We have been doing it over a period of time. This year while the industry has guided, the National Association of Software and Services Companies (NASSCOM) guidance is 11 percent growth for the industry. Even at the revised guidance, Hexaware would end with over 18 percent growth during the current calendar year. So, I believe that with the kind of advantages that we have in terms of niche areas where we are able to add clients, every quarter we have added 12 new clients. We have invested in more sales and account management engine, we have added 20 people during this year. From the strategy of focusing on 20 accounts we are now expanding to focusing on 50 accounts for the coming year. We believe that all the strategies that we are adopting and also investing in newer areas are doing well. For example, the remote infrastructure which has contributed almost 5 percent this year and is just a three year old offering and in healthcare which we launched just a year back along with insurance, it is contributing 15 percent of Hexaware revenue. So, there are various engines which are firing and we have continued to outperform the industry. I believe next year also, there is no reason to believe that we will not do that. Now, at this point what the industry growth rate will be and what we will be is not what I am able to foresee exactly.

Q: You spoke about a 5-7 percent decline in the margins in the fourth quarter, let’s take an average of 6 percent. How long will you take to recoup this loss in margins going into next year? Do you think it will be a sharp bounce- back in a couple of quarters or a protracted period that you will require to get back to the margin that you had in Q3? A: Absolutely. There is no doubt that the worst will be over with Q4 and from Q1 we will improve the margin. Now how much improvement we will have in Q1, is not what I am able to guide at this point of time. However, what is most important, is that the worst will be over. Will it remain at this level for a protracted period, well I don’t think so. This quarter the margin is impacted because the utilisation will fall sharply as we are not billing for certain engagement. The offshore ratio will fall this quarter. So, looking at these factors and not getting revenue, these are not the factors that can remain at the same level. In the coming year, the utilisation will continue to improve every quarter and we will also use the pyramid in a better way by adding more freshers. This year, we have added 550 people out of 1,000 or so. I do believe that next year, that pyramid will give us further benefit and the revenue growth will sustain. So, the margin would improve from Q1 itself. Q: Things are sluggish with a large USD 100 million multi-year contract as well. How much of an impact would that have on impairing revenue growth going into FY13 and FY14? A: I will not be able to comment on any one particular client or two. I don’t think this engagement is exactly part of that USD 60 million that you have referred to, but I would agree. If we are focusing on 50 clients, not all 50 clients are going to grow at the same pace. That is understandable, but overall I do not think that there is any major change in the growth. Yes, growth rate can change from year to year but our growth trajectory will remain very much on track. Q: Has something changed in the environment because you had two very good years. Every quarter you were beating the industry on growth, you were actually upping your growth rates. However, just in the last three-four months, you seem to have hit some kind of an air pocket where some of these incidents are beginning to come up, one client here, one client there. Is it a comment on how the environment is changing, going into next year? A: Environment has been challenging for both these years. It is not that environment has suddenly worsened now, there have been challenges in the environment. I am no economist to give any sermon on the economy, but the important thing is, within given circumstances, we as a company and we as a management team are able to provide value to clients. We are able to build revenue and improve our margins. So, that is the key and that has not changed.