Hexaware Tech sees some scope for margin improvement in Q4

Atul Nishar, chairman of Hexaware Technologies says the company has acquired twelve new clients in the third quarter of this year.  

The mid-tier IT services firm reported a 39 percent increase in Q3 revenues at Rs 507 crore from a year ago period. On a quarterly basis the company's revenues grew by 1.5 percent, below street expectations. During the three month period, Hexaware said its profits after tax (PAT) was at Rs 84.1 crore, up by 30 percent from the corresponding quarter last year.

The slow revenue growth was on account of completion of large contracts, Nishar said adding, onsite wage hikes led to margin compression. "We expect to better than our lower end of guidance in the next quarter," he told CNBC-TV18.

Hexaware expects to maintain margins at current levels in Q4. "We see some scope for improvement in margins," chairman said.

Going forward, Nishar said, the company will actively pursuing inorganic opportunities to expand its strength in different verticals.

Below is the verbatim transcript of Atul Nishar's interview on CNBC-TV18

Q: Your 1.7 percent dollar revenue growth in the current quarter has left investors wanting for more. Is volume growth turning sluggish?

A: Let us look at this quarter in the overall perspective first. This quarter, apart from meeting the guidance, we have acquired 12 new clients. In addition, we have won a large deal in Europe with totally new client in the area of capital markets. That strengthens our practice there in capital markets in Europe which we had not earlier had much strength in. Apart from that, on the people front, we have added 400 plus people and attrition fell to as low as 8.4 percent.

Now responding to your question on revenue growth, this particular quarter we had a situation where some of the large clients particularly the second largest to the fifth largest, in this category some of the engagements have ended and new projects have not started. Because of this lag the revenue growth, though meeting the guidance, probably is lower than what we would have liked at Hexaware particularly in view of the high standards that we have set in terms of growth at Hexaware for ourselves.

Q: Is growth going to bounce back in the current quarter to the higher end of the band? You have guided between 2-4 percent. You managed to do the lower end of the guided band this quarter. Does growth pick up enough in the current quarter to get to the top end of the guided band of 4 percent?

A: As you know, over last nine quarters most of the quarters we have performed at the higher end of the guidance. We expected the same from Q3 when the quarter started but that did not happen. All efforts are going on to make sure we do much better and not be at the lower end.

But ultimately the purpose of giving a band is that this is the possibility. We cannot rule out a possibility at whichever end we finally end up with. As you know in Q4 the working days go down and December is not the best month for starting any new projects.

Q: The bigger disappointment is margins this quarter - down to 21.6 percent. The street was expecting close to 23 percent. What happened there?

A: Firstly at 21.6 percent EBITDA, this is highest among all midsize companies in India. Having said that, on a quarter on quarter basis, this is lower by 1.3 percent. This is a quarter when we give onsite wage increase every year. We have stuck to the date. A wage increase of 4 percent has impacted our gross margin which has reduced by half percent. The increment impact is 0.7-0.8 percent. So, to some extent we have been able to absorb that.

The selling, general and administrative expenses (SG&A) have gone up by 0.8 percent and almost entirely sales and marketing has gone up 0.8 percent. So, this is where we are investing for future growth in the coming year. That is how the 1.3 percent has come. Now we have factored in all this. There is no one time additional cost that is going to come in Q4.

So, at this point we would say that the margin that we have achieved, it would be fair to assume that we would maintain at this level as a stable margin for Q4 as well. If we do better then that could be bonus. But I would say one can assume the same for Q4 as well.

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Q: You achieved a margin of 22.9 percent in the previous quarter. Would it be fair to assess then that the pace of margin improvements has peaked out for Hexaware? You can hold margins at current quarter but significant improvements from here will be difficult to come by?

A: Margin is a function of revenue growth. So, if the revenue growth picks up again as we have done in past particularly last two years, it is easier to absorb the wage increases and other costs. Once we have the annual plan ready for 2013 - that is when I will be able to respond to this question better. If there is more revenue growth then we will absorb the incremental cost better. But is there scope to improve? Yes, there is potential to improve the margins. Our average age of employees is still higher as compared to the large companies by at least 2.5-3 years.

So we are paying the employees that much additional cost because of the higher experience that they bring. We have to hire more freshers which we have been doing. This quarter also we have hired almost 170 freshers. That can bring down the cost per employee. Also, as we go on wining larger engagements, large projects, our cost efficiency will improve. Our infrastructure is getting better utilized, the campuses that we have built. So, there is potential to improve margin. If revenue growth also for 2013 is good then it is possible. But it is premature to say at this point.

Q: For now are you holding on to that 20 percent guidance for calendar year 2012 or do you see the need to change it around?

A: Looking at the perspective, Hexaware is one of very few companies to give guidance. We give guidance as high as 20 percent. There was no change in the guidance through the year nor are we changing it even today. There are few companies that gave some change but Hexaware has stuck to that. All our efforts are on to meet the guidance.

Guidance was given at certain specific exchange rates. What the rates will be by end of Q4, based on that we will have to calculate the guidance on the constant currency basis. The judgement can be formed after that as to whether we have met the guidance or not. It may happen that we may reach 19.7 or 19.6 or maybe even 20 plus, but in the overall context it would be fair to say in that case that we would have met the guidance.