HCL Technologies expects margins to be at 21-22 percent because of increased investments, says chief financial officer Anil Chanana. He says margins in the third quarter were compressed due to the increase in investments. In the second quarter, the company reported margins at 23.8 percent.
Anant Gupta, CEO, HCL Tech says the deal pipeline is better than the same period last quarter and the value proposition is also strong.
Chanana does not see any acquisitions taking place in the near term.
HCL Tech's consolidated net profit fell 12.2 percent sequentially (up 3.6 percent year-on-year) to Rs 1,683 crore, impacted by adverse cross currency. Profit in dollar terms dropped 12.1 percent Q-o-Q (up 2.3 percent Y-o-Y) to USD 270 million.
Below is the verbatim transcript of Anant Gupta & Anil Chanana's interview with Reema Tendulkar on CNBC-TV18.
Q: What is your target margin?
Chanana: We have been guiding for a very long period of time and also at the beginning of the year our target operating margin range is going to be between 21-22 percent and this is due to the investment we will be doing. So we have been pacing those investments, we have been making those investments and these investments to enable us to get into internet of things, the newer areas, the digitalisation as well as the next gen total IT outsourcing.
So with these value propositions in mind we started investing and we invested in 100,000 square feet of space in North Carolina; we invested in 100,000 square feet of space in Bangalore to setup a lab. We setup a co-innovation lab in London to assist our customers, to work with our customers in new innovation products and services; we setup another lab in Milan in Italy. So these are the investments which have taken place. We hired some 100 professionals to assist us like the technical architects to assist us in the digitalisation journey. We paced our investments up in the marketing events. So all these investments have lead to margin compression this quarter I would call it.
Q: Can you give us a breakup. 250 bps is what its decline, 80 bps because of currency, 40 bps wage and the rest of it is all investments?
Chanana: Yes, that’s correct. The currency impact was not 80 but 63 bps and 40 bps was the impact on account of wage increase which happened in this quarter, the cycle of people who were eligible in this quarter and the rest are all investments which have taken place.
Q: Every quarter can we expect the same amount of investments which could hurt your margins potentially by 140-150 bps or do you say that in this quarter there was a one-off element of investments and going forward the investment will not be to the same extent?
Chanana: It is a level. We have increased our investment level, so we will keep on adjusting that level going forward depending upon how much is needed. If I take a space, I am committed, I have made that investment, I will continue to incur that cost but we will see where we can take cost out from where and invest somewhere else. So this is a very constant exercise and operates within margin with a range of 21-22 percent and that margin band is sacrosanct.
Gupta: The incremental or accelerated investment has caused the band itself to comeback to what our guided operating range has been.
Q: Would you say that this quarter’s investments were on the higher side and in the coming quarters it will not to be to the same extent?
Chanana: You can say that but we have been working on this. This not like one quarter. We have been working on this.
Q: Coming to growth – yes, constant currency growth is 2.7 percent quarter on quarter, 15 plus on year on year basis but its still the lowest that we have seen in the last 12 quarters in constant currency term. Are there any growth alarms ex of currency because your peers have spoken about it? Tata Consultancy Services (TCS) has highlighted three key challenge areas, Mindtree face some issues with two clients.
Gupta: I would say we are happy with our performance on growth. If you look at from year on year (YoY) 15.4 percent or on LTM YoY perspective little over 14 percent are good growth and if you compare them with similar growth rates in the same quarter last year then you will see our growth rates have grown up minus currency. So we cannot predict the currency but we need to make sure that our engine keeps delivering us a certain amount of growth.
If you look at the deal pipeline that we have today; the deal pipeline continues to be better than what it was in the same period last quarter. So whether we look at it from pure infrastructure management whether we look at from application management or we look at integrated deals, the ITO, which we all bundle this in IT outsourcing, we continue to see good momentum. Yes, there is a market share, market competitive differentiation happening in the market from big five America, big five Europe more to local and regional but our proposition continues to be very strong and we continue to see a big growth there.
Q: No growth alarms in any geography, service line or vertical or any client?
Gupta: If you take it on year on year basis there is no alarm.
Q: In this quarter?
Gupta: No, I do not say from any alarm per se. I would say that some geography has done better, some service lines have done better but overall the performance has been good.
Q: No challenges that you see?
Gupta: Barring maybe in enterprise system integration, if you notice, we have shown a little degrowth in this specific quarter – that’s on the back of a very large programme coming to an end in the previous quarter but that is also on the back of two quarters of very strong growth of 4-5 percent odd for that service line. So no alarm bells per se, there is a shift in market buying behaviour we are seeing and it’s a constant endeavour to keep the value proposition, which is more relevant for the clients.
Q: You indicated that the deal pipeline is looking better compared to what it was a year ago coupled with the fact that the company is making investments for the future. Can we say that the constant currency growth next year will be better than what we are seeing this year?
Gupta: We do not give guidance.
Q: Just qualitative?
Gupta: The market exists, the momentum in the market exists, our investments whether it’s sales to acquire clients or whether it is from delivery management perspective, we continue to invest well keeping that opportunity which is there in the market place. We are not reducing spend in those areas. We believe that the overall budget is still the same but there is an opportunity to take on increased market share in the market place.
Q: We spoke about various investments that the company is making. Would an acquisition be something that HCL Technologies is looking at because your peers, TCS for instance did the joint venture in Japan, Infosys acquired Panaya. What is HCL Tech’s lookout in terms of acquisition and is it likely in this year?
Chanana: Inorganic growth is a part of our strategy and we do look for targets.
Q: Are you looking at one right now?
Chanana: We look at many, not one but there is nothing which is significant, which is going to happen immediately or in the near term but we continue to look at targets, we continue to evaluate them.
Q: Which is the focus area in terms of an acquisition where you see a gap and an acquisition would make strategic sense?
Chanana: Something which helps us to get client.
Q: Which area would that be? Would that be in geography..
Chanana: It would be geography; it could be in a service line. Different businesses have different aims; engineering is looking at targets aimed at where they need to enhance, applications is looking at where they need to enhance, so each have a sort of a lay down what they are looking at.
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