Focus now on under-penetrated infra services: HCL Tech

After having posted a robust 41 percent year-on-year rise in its net profit, HCL Tech aims to maintain its growth in the upcoming quarters. The guidance comes on a day when the stock rallied to a new high of Rs 925.50 on the back of the strong Q1 numbers.

In an interview to CNBC-TV18, Anant Gupta, chief executive officer & Anil Chanana, chief financial officer share their expectations from the company. Gupta explains the IT major is now shifting focus to the infrastructure markets as the penetration of infrastructure by Indian Outsourcing Providers (IOP) is less than 5 percent.

"I think the journey of an alternate operating model is available and it still is leading that charge. If one looks at the amount of deals which will get renewed from the rebid market in this calendar year going into calendar year 15, I think the market is there," adds Gupta. Below is the edited transcript of the discussion. Q: What stood out really actually is the margin performance, much better than what the street expected, better than your previous performance. What lead to this over 100 basis points improvement in margins? Gupta: It has been a consistent story of focusing on sharp areas, on our operating model, on the belief that non-linearity growth is what we are looking at. So, we are not looking at input based models for operations, but really looking at outcome based fungibility of resources. I would say a number of things across the board right from focus on what is the proposition for customers all the way to delivery and then following it through in operation discipline. I think across the board it has been like all elements kicking in into the overall performance - forex also has helped in that as well. Q: Do you want to add to that? If you could break-up what improvement in margins came from where? Chanana: Quarter-on-quarter (Q-o-Q) is one perspective but the bigger perspective is year-on-year (Y-o-Y). If one looks at Y-o-Y margins, whether it is earnings before interest and taxes (EBIT) level or net income level, they have gone up by 400 bps. That is a lot.
To explain as to how much came from currency, less than half of that came from currency, while more than half came from Hindustan Unilever (HUL) as Anant explained in terms of the inputs rationalisation, in terms of the different business model we have which is more output led model, the operational efficiencies and so on. Q: You have been able to maintain a scorching performance in infrastructure. Can you take us through whether you will be able to maintain this kind of a pace of well over 8 percent? Gupta: One thing we must keep in mind is that the market in infrastructure is still largely underpenetrated. Compared to software, the penetration of infrastructure by Indian Outsourcing Providers (IOP) is still less than 5 percent put together.
I think the journey of an alternate operating model is available and it still is leading that charge. If one looks at the amount of deals which will get renewed from the rebid market in this calendar year going into calendar year 15, I think the market is there.
From a market potential perspective I see there nothing which is not available to go after the significant growth that we are seeing. As the markets move, we need to realise there is one market which buys standalone infrastructure services, but on ongoing basis there is an increased focus, especially from our side on integrated deals which includes application and infrastructure. We are also seeing a level of enterprise functions coming into that fold. So, we will see a little shift in the way marketwise, but for the moment, we continue to be fairly well focused around the huge underpenetrated market in infrastructure services and the focus is there. Q: There as well you have reported better margins – 18.9 percent has become 20.6 percent that’s fairly handsome. In the way the market shifts will the margins come under pressure or will they improve? Gupta: Given the quality, given that these annual deals are three years, five years deals when we get a customer onboard, there will always be a reduction in margins for that specific client engagement. We also over invest during the initial phases and as the engagement moves from transition to steady state and then to the efficiency phase, the margins then move.
However, at an overall level, the impact is really a balance between what new engagements are coming in and which engagements are going to steady state. We have reached a level of equilibrium where engagements moving to steady state versus those which are coming in are fairly well balanced. But given the potential that we have in the market from rebuilt stand point, we will continue to be very focused at wining engagements. One can depend on how that balance moves. One may see a quarterly aberration but on an overall yearly basis, one should see consistent margin profile around that number. Q: You have reported over USD 1 billion in terms of new deal wins can you give me more colour on where these wins have come from – were they largely in the infrastructure space. Just more colour where they came from? Chanana: They came from infrastructure, BPO and application space, everywhere.
Secondly, from the geography perspective, they came from Europe, United States. So, it has been very strong. Then there is the transformable, renewal market where we are focused on. So, apart from the traditional renewal market and now the focus has gone into the transformational side of the market. We have also seen some of these coming in from there. Q: Can you give me some colour on the deal pipeline? How is it looking? Will you be able to maintain this pace or even improve upon deal wins as there seems to be some improvement in the US economy and perhaps European economy also troughing out? Chanana: One can see from the report that the second half is likely to be better than the first half. Our pipeline continues to show the momentum. Q: Utilisation levels are fairly high. Are you reaching a kind of a plateau there, a cap over there? Do you think utilisation cannot get better than this? Chanana: We are at a very decent level, but we do have pockets where we can derive more efficiencies. Currently we are at an optimum level.