H2 will be better; maintain 21-22% EBIT margin band: HCL Tech

The deals which we have signed, they continue to move into steady state. We are extremely confident of their conversion and then realisation over there. If you look at our deal pipeline, again, that continues to be robust. So, I would say all-in-all it is a good performance by the team; it is broad based.

If you look at each business line, engineering, again, if we go into quarterly reflection, we will take a different connotation of engineering but engineering services delivered 24 percent Y-o-Y if you take a full calendar year basis. If I take infrastructure services, delivered 16.4 percent, so, fundamentally the businesses are robust.

Q: For three straight quarters now, your margins have been below your own guided band of 21-22 percent. So, are you still holding on to this margin band, 21-22 percent at the EBIT level?

Chanana: The answer is yes, we continue to have that as a targeted margin range which is 21-22 percent. If you see this quarter, there has been a significant improvement in margins. If you look at our EBITDA margins, EBITDA margins now are at 21.5 percent which is an increase of about 90 basis points as compared to last quarter.

If you look at the EBIT level, the margin again has increased. So, while our revenue increased by 1.4 percent, our EBIT margins, the income at EBIT level increased by something like 5 percent and net income level as you rightly said because of the higher other income, increased by 10 percent.

Q: Can you breakup the margin for us, what was the impact of the currency, what was the impact of realisations, utilisations, etc?

Chanana: It is a multiple factors in this particular one. It will have utilisations, it will have very marginal impact on account of currency, we did not have the headwinds which we had last quarter because of one of the projects which we were executing. It has been a good quarter I would say on the whole.

Q: So, you are not giving me numbers, but once again on growth. Last time you said that your order book is 100 percent higher than your previous best. Can you update us on that number?

Gupta: Our order book continues to be very robust. We have signed another billion dollars worth of large deals, eight transformational deals in there. Again, well spread across multiple business lines. We have not obviously included the large Volvo engagement yet in any of these numbers, they are not signed. It is still a letter of intent (LOI), the contracting is going well, it is going as per plan, so we continue to be very hopeful of it getting done on time as per plans, so I would say otherwise, the order book is very healthy.

Q: Better than what it was in the September quarter?

Gupta: I do not have a number to tell you but all I can say is that it is definitely very robust.

Q: One criticism, since we are on the subject about deal wins, is that you have been consistently winning deals of over USD one billion for the last 11-13 quarters, which means on an annual basis, your new deal wins are close to about USD four billion. Even if we assume an average deal cycle of five years, which means that the potential incremental revenue could be close to about USD 800 million. But, if we see that the actual incremental revenue addition on a 12 month basis, or four quarter basis, it has been consistently coming down and this quarter, it is actually at USD 450 million vis-à-vis a potential of USD 800 million-one billion going by your recent deal wins. Can you explain that conundrum to us?

Gupta: Just take one number. I just said on a constant currency basis, we delivered CY15, grew by 13.5 percent over CY14. So, we convert that maths, it will be somewhere near that number.

Chanana: USD 700 million odd.

Gupta: It will be around USD 700 odd million. So, do not look at it on a quarter basis and that is what the number translates to. Of course, there is an impact of currency and all that. Keeping that aside, 13.5 percent reflects that USD 700 million.

Q: Even on a constant currency basis, if we look at it, your revenues have been consistently coming down. It was at 16-16.5 percent constant currency Y-o-Y growth a few years back and this quarter it has come in sub 10 percent. How would you like to comment on that that even in constant currency basis when we look at your growth numbers on the quarter-on-quarter (Q-o-Q) basis, they have been coming down?

Gupta: I would just say look at it from a full last twelve month (LTM) basis. They will continue to be robust and if we even fast forward, they will be robust in that fashion. Our focus is not about delivering numbers quarterly; our focus is around delivering the engagements with customer satisfaction properly and winning deals.

They will convert in a 12 month period, large deals will convert. If we announced that we had 10 large deals in infrastructure and flight last quarter, two of them went into steady state in this quarter, eight of them will move in January-March quarter. So, I think we are completely confident of our conversion, of our bookings converting into revenue and therefore reflecting in the full LTM growth.

Q: Any particular reason why your headcount has declined for two straight quarters now? Would you like to comment on that and the fact that attrition continues to stay around 16-17 percent. There has not been any improvement.

Chanana: If you look at our business model, it is very different. Our business models, a lot of focus is on high value addition by our employees. If you look at our revenue per employee is Rs 60,000. If you take an average of the IT industry, it will be at least 22-25 percent higher than the average, number one. Number two, if you look at our managed services component, 57 percent has again gone up this quarter. So, these are like managed services contracts where you have the ability to execute.

Q: So, we should not fret and read it as a sign of slowing in the market?

Chanana: Certainly.

Q: Is it on account, because your India business has been under pressure? Even this quarter, rest of the world has degrown?

Chanana: I think the global business is increasing significantly, though ROW on a calendar year basis did increase by about 8 percent, but if you look at America grew by something like 13.8 percent, Europe grew by something like 15.1 percent.

Q: I remember very clearly that last time you also told us that growth for HCL Technologies will be better than the average of the top-three players, but that average is not much. The average would be 7.5 percent at best, so even if you beat that average, you are still likely to be number three out of four. So, give me some more colour because just purely saying you are going to beat the average is not saying much at all. Are you likely to be at the top end of what the top-three companies are likely to report, how would it compare to NASCOM?

Gupta: I think we want to change our commentary on that. I think the order book, the deal pipelines are good, are healthy and of course, we would like to have industry leading growth, that is what I would say.