HCL Tech will reach out for new deals by Oct-Nov

HCL Technologies, India's fourth-largest software services exporter, reported a 67.3% rise in quarterly net profit, just shy of expectations, after winning more outsourcing orders amid the global economic uncertainty.

Speaking to CNBC-TV18, Vice chairman and CEO Vineet Nayar said that though macroeconomic initiators continue to be weak, he remains optimistic on account of vendor churn on account of vendor churn. He says the opportunity for innovative vendors is "large". However, he added that HCL has not won significant market share from Indian IT vendors. "The customers have started competitive bidding," he said. HCL Tech’s total income rose to Rs 5,919.1 crore during the reporting quarter from Rs 4,299.5 crore in the corresponding quarter last fiscal, a rise of 37.7% Anil Chanana, CFO of HCL Tech said the new spend component of the company is down 20%, while restructuring is up 40%. “We are focusing on restructuring market, which is growing,” he told the channel. Chanana said operational efficiencies and fall in the rupee has aided margins. HCL Tech management said the focus will remain on maintaining momentum than margins. "New deals have come at higher margins," Nayar said adding, "USD 2 billion came from new business which the company had incubated." HCL plans to reach out for new deals by October-November. HCL Tech added 8 multi-year, multi-million deals in the June quarter. It grew 2.7% in the US and 7.1% in Europe. In terms of dollar revenues, Q4 sales jumped 3% to USD 1079.61 million against USD 1048 million in the previous quarter. This is the most important number for IT companies, which earn their revenues in dollar terms. Shares of the IT major shot up over 6% to Rs 509.50 in early trade in a weak market on the back of strong performance. Over the last few quarters, HCL Tech has inched ahead of its bigger rivals like Infosys and Wipro on the back of strong earnings growth. _PAGEBREAK_ Q: This has been quite an eventful year for HCL Technologies. It has closed the valuation gap out completely with some of its peers. But how do you see the current year now panning out without getting into any kind of numerical guidance? Nayar: I think there is no change in the current year. The macroeconomic indicators continue to be bad, European challenge continues to be bad. At the same time, because of the churn in the market space, I truly believe the opportunity for innovative vendors is quite large because for the first time the customers are willing to look at new vendors. At HCL, despite the macroeconomic indicators, we continue to be optimistic about our profitable growth trajectory, which we are charting out for the last three years, and hopefully, for the next three years. Q: Your dollar revenue at 17% plus this year was better than many of your peers but this year everything is up in the air. NASSCOM is saying 14-11%, some of your large peers are saying 5%, what can you deliver on the 17% growth that you have delivered this year? Do you think the NASSCOM estimates are accurate or will numbers be very polarised? Nayar: I think NASSCOM has a very difficult job of aggregating number, which is 3% of the global tech spend and try and conclude that. If you really look at the new spend, it is down 20% year on year (YoY) from first half to first half. The restructuring is up 40% YoY, so depending on which seat you sit and which markets you focus, you would either see it as a great opportunity or a great bet. Therefore, you see different commentaries coming from different people depending on which seat they are sitting. From HCL point of view, we took that decision to sharply focus on the renewal or restructured market and that market continues to be big. We won extensively; as we announced in the last quarter USD 2.5 billion, 86% of that coming from Fortune 500 and Global 2000. Our USD 100 million clients has moved up by 500% in one year. All those are because we executed on that strategy right. Going forward there is no change, we need continue to execute on that strategy - what would that result in it’s difficult to say right now plus we do not give guidance. So we will come back every quarter and say this is what we did. Q: Can you give us any numbers to substantiate the kind of volume market share that you have rested from other Indian competitors this year and whether that is still up for grabs or has the low hanging fruit been plucked because of the changes in FY12? Nayar: About 78% of our wins have come against global competitors HP, IBM, Accenture. Therefore, we have not taken much away from the Indian players because we are focusing on total IT outsourcing. I believe that the whole space has not played out completely. We believe there is still USD 48 billion of restructuring deals, which will come in for renewal largely starting at October, November, December in the next four quarters. Therefore, there is still a lot of headroom left for the next three years and the opportunities are very large. In addition to that, one very important factor is HCL buying deals at price. I think this quarter would have concluded for everybody concerned that all the deals which we have won are actually coming at higher margins, which is the reason of the margin expansion. Also, the growth in enterprise application is also demonstrating that once you get into those deals, you can actually pull in the Axon business because of which Axon has demonstrated a significant growth. So it’s a combination of critical strategy of going in with run the business, pulling in change the business and improving the overall margin profile for the Fortune 500 customers is the strategy which we will continue going forward. _PAGEBREAK_ Q: The street was expecting 22% on margins; what clicked for margins this quarter? Chanana: Partially, it was aided by the currency; rupee depreciated by more than 10% in this quarter. Secondly, the operational efficiency, the execution did well. So whether you look at the utilization numbers or you look at the realization numbers, they are up. Q: You started the year just above 17% margin and you are exiting it at more than 19%, is there more room for milking margins further or improving them from hereon? Chanana: We stay away from giving any guidance. But we are focused on profitable growth, and not just profitable growth but also converting that profit into cash which conversion ratio has been 100%, managing our working capital very well. You also saw our dividend having been increased to Rs 4 per share this quarter, which has two elements one is the quarterly dividend and another is the annual dividend, which the board decided looking at the performance of the company and the need for cash. Q: You want to add to that because that’s been a key monitorable for HCL Tech on the pace at which it can ramp up margins despite this market share grab strategy that it is adopting? Nayar: I have always said that we have significant margin levers whether it is utilizations, freshers, deal margin expansions because of the quality of customers increasing, cross sell, up sell and currency. The question is what you do with margin expansion. Do you invest it back in business? Do you release it through P&L? Our view has been that we need to invest it back in business whether incubating new businesses. If you look at our USD 4 billion performance; USD 2 billion is coming out of businesses which we incubated from scratch; infrastructure management and the AXON acquisition which has done hugely well. Therefore, if I look at 2015, if we do not incubate those businesses the additional USD 2 billion will not come, and therefore, the ability to reinvest the additional margins back into business will be a critical successful factor for HCL. So there are possibilities of margin expansion. At the same time, we would reinvest them back in the business is the way our current thinking is. But we will evolve it based on how the market looks, how does the customer budget behave, how the competitive environment come up, what kind of opportunities for incubations do we see, and therefore, in the future we will take it quarter by quarter. Q: What is the pricing environment like because all three of your larger peers in the sector have demonstrated some weak pricing trends over the last couple of quarters? Is it because of the market getting more competitive, clients asking for better deals and what is the experience at your end? Nayar: The market is more competitive because all the customers especially the financial services institutions, which were not open to new vendors have suddenly opened their doors to competitive bidding on the existing contracts. This is one of the reasons there is a significant growth for financial services for HCL. Therefore, the pricing for existing vendors who were not delivering the kind of value which the customers were expecting from them, they would be under significant pricing pressure. Having said that, for people like us who are delivering significant value, we believe there is the pricing scenario continues to remain the same. I had alluded to a margin trap about 2-3 years ago of the fact that when we get into the recession, the pricing and the competition increases. Therefore, you have to restructure your margins so that you continue to be competitive because one thing you should never lose in business is momentum behind you, the day you lose momentum behind you, the customer start doubting you, the employee start doubting you and that is something which is very critical at the HCL end. You can expand margins anytime, you should not lose momentum and that is what we will continue doing. _PAGEBREAK Q: What are you building in the margin performance or expectation for this year in terms of wage hikes, because there too, we have seen some very disparate communication from the other leading companies? Chanana: The wage hike will be impacting us between 180-200 bps and it will be split over two quarter, which is July to September and October to December because we have two cycles for different people. Q: I have to ask you this personal question, because that created so much confusion over the last few months when you sold your stake or most of it down in the market. I know there was a clarification from the management after that, but this is the first I am getting to ask you about it. It’s sent a wrong signal to the market. Why would the CEO who is running the company, bullish about prospects sell his stake down? Nayar: I think we have said enough on this topic and I have nothing more to add. The results speak for themselves and the results in the future will also speak for themselves. Q: Can you at least assure your investors that you will be around for the next one year at least? Nayar: As I said, there is so much which has been talked about, written and HCL has issued a very clear communication on that. There is nothing more I can add to that debate and I do not want to add to that debate. I think our numbers are speaking a story by themselves and that’s the story we should be focused on. Q: It’s a straightforward question. Are you going to be around or not? There is no debate on that. Surely if you are going to be around you can tell people that I am around? Nayar: I have never ducked any question. There is a very clear communication of the fact that I am and will continue to be the CEO and Vice Chairman. I don’t know what else I can add to that statement. Q: What is the demand environment looking like now? Will HCL be, for the next couple of quarters, on execution mode of deals bagged in previous couple of quarters and it’s only towards the end of this calendar that the deal pipeline starts opening up again for HCL Tech? Nayar: I think one of the things which happened is that we were very fortunate to get into some very large Fortune 50 companies with very large deals. We just finished our CSAT survey which is customer satisfaction survey and it is at a historical high over five years. For a company to grow, it is very important for us to continue that momentum of the fact that we are not obsessed about growth but we are obsessed about customer satisfaction and employee satisfaction. Therefore, we shut our doors to any new deals and moved all our bets and investments in executing well so that our CSAT continues improving. October, November, December would be a new quarter. I think that is a time we would renew that strategy and think about the fact that we have executed most of the transactions by that time and we would relook at the market because the market is expected to open up again in October, November, December as per TPI indication. I think from October to March, we would be very aggressive in growth participation and new deals.