HCL Tech: Market sentiment likely to remain strong in 2013

Software services exporter HCL Technologies' says it continues to see market opportunities with respect to non-discretionary spends by companies and overall growth is likely to remain strong in 2013.

The Gurgaon-headquartered company's second quarter (Oct-Dec) net profit rose better-than-expected 69 percent year-on-year to Rs 965 crore, and revenue was up 20 percent to Rs 6,274 crore, helped by new deal wins and strong demand for IMS.

Anant Gupta, HCL Tech's new CEO, who was until recently the operations chief, said 2012 had been a "exceptional" year for the company and market sentiment is expected to remain strong in 2013. The company will continue to see growth in the US market and continental Europe in 2013, however, telecom services segment remains subdued and it is not expecting strong deal flows from that vertical in coming quarters, he added.

Here is the edited transcript of the interview on CNBC-TV18

Q: When we saw last time’s 21 percent plus kind of margins, it was a bit of a surprise and the expectation was with staff expenses this time, that perhaps will not be maintained. Can you explain how you are able to better on margins this time?

Gupta: For HCL, 2012 has been an exceptional year. While the industry was faced with difficult times, within HCL all our cylinders were really firing together. If you look at our revenues, they grew 13 percent, our net profits were up 41 percent and we also had an operating margin expansion of 360 bps.

If you look at it from pure Origin & Destination Solutions (O&D), Q2 quarter revenues grew 3.6 percent which is the highest growth in five quarters. Our EBIT margins also grew significantly on YoY basis from 15.8 to 19.8 percent. If you look at deal bookings, again we had a very strong quarter. We booked over USD 1 billion worth deals in which we also had six large transformational engagements. Overall, all the cylinders are firing.

With respect to the margin expansion story, I do not think it is a single quarter kind of an action which is there. It is something which we have always been saying. It is a continuous progress. It obviously is dependent upon the amount of new business or large scale engagements which come into transition, where we invest or overinvest from a resource standpoint as a balance between the number of engagements which move out into steady state. So that also plays a role in it.

Secondly, there are some levers around the operating side, especially when you see a dip in discretionary spend utilization going up. I would say, largely, those are the reasons.

Q: Will further improvement be difficult on the margin front or are there still levers?

Gupta: I would say we are operating in a comfortable region and about the point I made earlier, it really depends upon the balance between new businesses acquired, which are complex in nature to transition vis-à-vis what moves into steady state. Given the fact that we see a huge market opportunity, we will continue to focus on trying to have a high win ratio over there.

Win ratios for the last quarter was 50 percent. We will continue to maintain that and therefore, we will keep growth and margin expansion or operational efficiency in tandem with what we see in the market.

_PAGEBREAK_

Q: Can you give us an idea of how volumes will pan out? Some of your peers have spoken positively about 2013. Tata Consultancy Services (TCS) was maintaining that if in 2012 we could see through this kind of a volume growth, in 2013, if anything it will be better. It was an outright positive statement. Are you equally positive about 2013 and what kind of volume growth can you guide?

Chanana: If you take the October to December quarter, there has been a 3 percent volume growth. It was on top of 4.5 percent growth which came in the July to September quarter. We signed deals worth USD 1 billion. I think the key is the quality of our revenue is very different.

We have annuity revenue stream in our business. We have a visibility for the next 5 to 7 years depending upon the deal term as to when the revenues will flow. That gives us huge visibility. On top of it is discretionary business which keeps on varying from quarter to quarter. We do not give any guidance, but these are two parameters which we will play out. I would therefore say, we are positively placed.

Q: What is the sentiment out there as far as 2013 discretionary spend and other spends look like? Would you say that 2013 qualitatively will be a better year even if you do not give us any quantitative guidance?

Gupta: We need to look at the market’s sentiment in two buckets. One is around the non-discretionary side. We fundamentally believe that market opportunity over there continues to exist. Sentiments about customers wanting to drive cost benefits and therefore, outsource their operations will continue to be a strong momentum in the market.

If you look at the discretionary side, I think it is still similar to what they were. They are actually getting bundled in along with the transformational non-discretionary side of the business so that customers unlock savings, so that they can invest into some of the discretionary transformational elements over there. Finally, there are certain sectoral specifics like healthcare and utility where we would see some increased investments for reforms, but fuelled by operational cost savings.

Q: What appears to have been surprisingly a very good performance has come in from Europe and from the financial services segment. Of course Infrastructure Management Services (IMS) has also done very well. Would you say that we can expect better performance from these verticals in 2013 as well?

Chanana: This is a participation in the rebid market which has contributed to the growth in infrastructure services. So far financial services are basically led by various geographies. We have a very balanced mix and there is again a part of rebid and part of work on the application development side.

Gupta: We will continue to see a balanced growth in both US as well as continental Europe. Continental Europe is largely underpenetrated and we should see some increased demand coming in from there, especially when we see the rebid decisions being taken.

If you look at sectors, I would say broadly all sectors seem to offer good growth, whether its financial services or if you take healthcare, which is 3 percent on back of more than 14 percent growth rate in the previous quarter or manufacturing or media publishing and entertainment and of course the utility side. I think the one sector which we continue to be cautious on is the telecom service provider sector. That is one area which we would continue to observe but, other than that most of the other sectors seem to provide equal opportunity for growth.

Q: Pressure seems to be lessening on several quarters, as well as on HCL’s cloud and vis-à-vis the rivals in comparison is growing. Do you think billing is going to be the advantage in 2013?

Chanana: We focus more on the realization than the billing. So the realization this quarter, particularly for offshore has improved slightly. But, more or less, it is almost same. We do not see any change in realisation environment per se.

_PAGEBREAK_

Q: You do not see it improving?

Chanana: I do not see any major change. It will vary between running the business and changing the business. It depends upon how much change comes up in the business, the amount of new business coming in and the demand there.

Q: How does the new deal pipeline look like?

Gupta: We continue to remain very bullish on the non-discretionary side. We have a strong pipeline, in fact the pipeline that we have in the current quarter is larger than the pipeline that we had in the same quarter previous year. I think where we will remain concerned or cautious is around the discretionary side of the pipeline.

There are small engagements. We look forward to them getting converted into large scale implementation which normally follows on after the initial filing. All in all, we have a healthy pipeline and therefore, we continue to invest in ensuring that we acquire a significant portion of the market that we are focused on.

Q: What do we look forward to from the new captain of the ship, more of change or more of continuity?

Gupta: I think it will largely be continuity because most of our strategies were planned and we continue to grow on them. So there is really no change. I think with the changing dynamics in the market place, we would further fine tune and take a more aggressive position on what we call as alterative sourcing and therefore, it will largely be on aggressive position build up on the strong foundation that we already have.

Q: What is the outlook in terms of hiring?

Chanana: We continue to focus on where there is business growth. Growth is there and therefore, we have been hiring. So, if you look at the infrastructure business, we hired there as well. Some of the businesses like business process outsourcing (BPO) have been going off through a transformation and there has been lesser hiring. In the software services, it varies depending upon the line of business, whether it is enterprise or whether it is a custom app.

Custom app has been showing a good growth of 2.5 percent this quarter. So it is (a) business dependent (b) we have been improving our utilization and (c) there is a lot of engagements where the infra team and the application team are working together. It is basically trying to create a fungibility of the resources.