Growth in second half of 2016 to be good;digital a key focus:HCL

The third quarter for HCL Technologies saw balanced growth across portfolios, said Anant Gupta, Chief Executive Officer of the tech company. The second half of CY16, as guided earlier, will be robust, he added.HCL Tech reported weak set of third quarter earnings with net profit rising 0.3 percent to Rs 1,926 crore and rupee revenue coming in at Rs 10,698 crore, a 3.4 percent increase on a sequential basis. Anil Chanana, CFO of the company, says the focus is on improving the growth momentum. The focus is on improving digital and Internet of Things (IoT) segments. To that end, the company has created a strong pipeline, he added.A strong orderbook gives management the confidence of clocking in good growth numbers in the coming quarters. "Inorganic ordebook is very strong," said Gupta.HCL’s booking profile (deals) is in excess of USD 4 billion for this fiscal, Gupta adds. Below is the verbatim transcript of Anant Gupta and Anil Chanana’s interview with Reema Tendulkar on CNBC-TV18.Q: What are the key reasons for the weak quarter?Gupta: If you really look at our growth rate and now start dissecting it, America has grown by 14.8 percent year-on-year (YoY), Europe by 9.8 percent and excluding India, rest of the world (ROW) grew by a good 12.2 percent. So, I would say balanced growth across the portfolio over there. Engineering services, infrastructure management services continue to lead the pack and deliver but as I said across lines of business some of the big ticket deals which we had clearly mentioned would kick-in April 1 onwards is as per that plan. Q: For H2 to look better than H1 you need the next quarter to be better than this quarter, is that likely, next quarter growth should be better than what we saw this quarter? Gupta: Like I said, we had clearly said H2 will be robust and therefore we continue to believe the next quarter will be strong. Q: While the margins have improved, it is still at 20.8 percent and that is lower than the 21-22 percent margin band that you had guided for in this quarter as well as next quarter. What was the reason for it coming in slightly lower? Chanana: As I said, our targeted margin range for this year was 21 percent but we could deliver 20.8 percent which is very close to what we had estimated. I think as Anant mentioned, our focus has been on certain markets and our focus has been on developed world and on the Asia-Pac excluding India part where we had significantly grown double digit growth through and through. We did acquisitions, we did Sematech acquisition, we did service commencement so far as Volvo is concerned. So our focus is to be build business and create that business and create that momentum.Q: What would be your margin guidance for the coming year now FY17? Chanana: I would sort of stay away from any number, I would rather sort of focus on the business, how we can grow our business, continue to grow our business. Q: You are not maintaining the 21-22 percent band this year? Chanana: We don’t give any revenue guidance. Q: In the last four quarters, your margins were at 20.3 percent. Would FY17 margins be lower than that or higher? Chanana: I think as I said, there are lot of opportunities in the marketplace. So, we would rather focus on those opportunities rather than saying that we will be within a certain margin range. Q: Those opportunities come at a cost, you made acquisitions which are margin dilutive so do you see the margins dipping below 20 percent? Chanana: It allows us to sort of focus our resources or divert our resources to the markets, to the areas we want to. We have taken three major belts, digital, Internet of Things (IoT) Works and Next–Gen ITO and we have made strong bookings and created a strong order book to deliver. Q: You spoke about 11.6 percent constant currency growth in the last four quarters but that is lower than what peers have reported. Historically HCL Technologies used to lead the pack with industry leading growth. What can you guide for FY17 for the topline? Gupta: I would not guide but all I can say is I did mention it earlier as well in previous quarters, we had a certain trajectory in infrastructure management largely coming off from the fact that some large deals, the one-time component of that, obviously the one-time component gets over but the recurring revenue grew by a healthy 27 percent. So even if we look at this quarter, the recurring revenue stream actually grew by 27 percent YoY which is really the quality of revenue we are looking at. There will be one-time projects as part of large deals, they will come in and we will execute to that. If you look at the booking profile that we have done, last nine months, it is in excess of USD 4 billion outside of the inorganic component of Volvo transaction. So, it includes the component which is for Volvo Trucks as a company which we will deliver outsourcing because that is how we look, we don’t include acquisition total contract value (TCV) in our booking profile. So, USD 4 billion over there plus whatever is come from the inorganic side is a very strong order book. Even if you look at this quarter, in excess of USD 2 billion and again outside of the inorganic component I think it puts us in a very strong position to actually deliver industry leading growth.

Q: The other way to look at the TCV is USD 4 billion in three quarters, your incremental revenue addition in the last three quarters was closer to USD 300 million. That is less than 10 percent. I don’t think that the deal, the size or the tenure of the deal is more than 10 years to explain this so while you are winning strong deals, the street is a bit worried. Are you losing out on a couple of the other deals then or your existing revenues?Gupta: It goes back to the one-time component, obviously the one-time component comes close or reduced when they get over and also the fact that if you take large transaction in the engineering for example we did announce couple of very large transactions in maybe six or seven quarters back. Once they move into - now they follow the same trajectory as infrastructure management or any other large deal will follow trajectory where you get a bump off the revenue and as they move into a more recurring steady state model, the margin profile increases and the revenue will start. So, I would say therefore the order book is strong, the pipeline is good and therefore we continue to believe that we will deliver good performance. Q: How many of the infrastructure engineering deals hits steady state in this quarter, the quarter gone by and how many will hit in the coming quarter? Gupta: I don’t have a number on that. However, we are selective in the market that we play in. One of the reasons why we look at different geographies and segments, so our focus is whatever number of deals are there as an opportunity, in that selective play we will participate. In some quarters there will be a larger profile of them and we will focus on that rather than worrying about how to balance the incoming and outgoing just for the sake of managing quarterly numbers. Q: Speaking about focus, revenues from Europe have declined for two straight quarters now. This quarter financial services also has seen a revenue contraction. Could you explain? Gupta: I think Europe continues to be very strong, 9.8 percent.Q: Then why is it lower quarter-on-quarter (QoQ), for two quarters now? Gupta: Most of the revenues in our business don’t look at QoQ and I have said this before. You look at it on a YoY and how we deliver, I think 9.8 percent constant currency growth for Europe is industry leading. So, you will see that. I think BFSI, we have seen some restructuring happening in the marketplace especially on the back of increased compliance requirements which are driving that segment. So, large tier I banks are relooking at the way they outsource, setting up more industrialised processes in capitals before they would pan out again. So, I would say maybe a couple of quarters before we see that back on track in terms of increased flow. However, on the other hand if you look at some of the emerging momentum plays where there is significant disruption happening like life sciences or energy and energy oil and utilities because of oil prices and also telecom because of convergence in there you see these growth rates over there. 27 percent YoY on healthcare and life sciences, you look at 22 percent on telecom and about 17 percent on energy oil and utilities. So, I think different corners will have a different behaviour but like I said for BSFI in my view few quarters ahead once large tier I banks really industrialise their sustainable operating model, I think we should see that come back.