Infra digitalisation; strong demand key to growth: HCL Tech

HCL Technologies' fourth quarter has missed the street forecast on bottomline while revenue met the expectations. Speaking to CNBC-TV18, Anant Gupta, President and CEO of the company maintains that its margins guidance of 20-21 percent for the year. Read more at: HCL Tech Q4 net up 5.9% to Rs 1783 cr, revenue meets streetHe says digitalization in infrastructure, modern application and engineering services is going to aid HCL’s growth. Along with the European market, Germany and France will also serve as an opportunity for the company, says Gupta.HCL Tech is continuously focusing on the changing technological environment and is investing accordingly, says Gupta, adding, the company is investing in co-innovation labs and in increased re-hiring, which will start benefiting by the second half of this year.Below is the transcript of Anant Gupta and Anil Chanana’s interview with Krtika Saxena on CNBC-TV18.Q: What is the reason for margins coming in lower?Gupta: Firstly, the margins are in line with what we had planned. So, it is not a surprise. We believe the year has been very strong for us, Infrastructure Services Division (ISD) year-on-year (Y-o-Y) growth has been 15.1 percent.Our investments in what we believe are fundamentally shifting the market, are going in the right place and we are pretty confident of their delivering to the strategy for what it is. So, whether it is increased rehiring of people in large scale deals--we talked about engineering services outsourcing - there are engagements which are moving more full service which requires us to do the end-to-end engagement before they move to steady state and improved margins. Similar to the infrastructure business of what we saw in 2009-2010 and we have successfully demonstrated how you can take money out of that as the engagements move into steady state. So, that is one reason. Secondly, the whole concept of investment in co-innovation labs, investing in a talent profile which will drive some of the transformational engagements going forward into digitalisation, also chips in into the investments which are coming about there; so, largely these two things. Other than this, maybe from a quarter perspective, higher outflow on visas which is a seasonal parameter is what we saw in the previous quarter. Q: In that case can you give me a break up of the margins for this particular quarter and typically last quarter you had indicated that you want to maintain the 21-22 percent margin band. Is this one quarter a one-off and from next quarter onwards would you be able to cross or rather stay within that band? Chanana: The band is for the year, not for the quarter; so, we are very confident that for the next fiscal year (July to June) we will be able to maintain the margin at 21-22 percent at EBIT level. Q: This quarter can you give me a break up of the margins, what has been the exact impact of visa cost and the increased investment and of course there would be some kind of a positive impact owning to currency? Chanana: We had a positive impact on account of currency, you are absolutely right, of 40 basis points. At the same time we had negative impacts of visa cost as I explained about 60 basis point and we had higher SG&A of about 70 basis points and our continued investments show delivery centers and hiring talent for digitalisation, hiring talent for risk and compliance. Those areas are adding up to another 100 basis points.Q: So, in that case going ahead what is your outlook with respect to investments? Will you continue to or rather when would these investments start bearing fruit in terms of pure play margins level because of course margins are getting impacted and you said that you would rather take the risk of margins getting impacted and you will continue to invest but by when will the investments gradually come down and you would actually see the impact flowing into the numbers?Gupta: We will be in our guided range of 21-22 percent for the full fiscal. There will be some engagements which we will deliver in first quarter, some will move in the second quarter and so on but from a full fiscal perspective we believe that we should be able to execute to the range that we have talked about. We should look at some of these from a little longer-term perspective and some of these will really mimic the way fundamentally the market is changing. So digitalization is not come on its own today, digitalization has been there for a while. The nature of that engagements are shifting – digitalization has been there in infrastructure, it is there in engineering, it is also there in modern applications that we do but the way we looked at the market going ahead is innovation along with our customers and building some of the transmission programs for the future, they will take time. We added about 47 customers in the year with a little over a million dollars plus separate from the customers in the large deal USD 30, 50, 100 million. Now those customers are on a journey, they will work on small programs before they move in to midsize and large engagements and they are not going to happen overnight, they will take one to three years and each one of them will be in a different phase over there.Q: So, the increased investment if I am correct will continue for this entire coming fiscal, so then by post FY’16 is when you are saying we will actually start seeing that increased margin outflow, am I correct?Gupta: Yes digitalization, we should see a longer horizon. If you look at some of our investments in large scale engagements like engineering services, they will move into steady state little earlier than the end of the fiscal itself. So, they should translate into a better margin trajectory but it is a little unknown at this time how digitalization will pan out, so it could very well be possible that some programs move faster than others in which it would be a positive surprise as well.Q: Let me ask you about the overall deals and trajectory, for this particular quarter also you have crossed about USD one billion, for the full fiscal around USD 5 billion. Q4 typically is seasonally weak when it comes to quarter -on-quarter (Q-o-Q) deal wins, have you seen that impact and can you breakup the deal wins for this particular quarter. Chanana: Anant will be able to give you much better perspective here but as per, one of the analyst’s reports, ISG, basically saying that in the next six months the deal signings will be more stronger than in the first half. So, I would say that there is a huge pipeline which significantly has increased over the same period last year.Gupta: The pipeline as we see today is larger than same period last time. I would still say there are some very large programs which will potentially shift into H2. If you look at last year, we had significant number of bookings in the USD 100-300 million deal range, previous year we saw a couple of deals in the USD 500 million plus range, last year we did not see that. As we look at our pipeline, we believe there are number of them in here but some of them will go into H2 from a digital making standpoint.It is also important to really look at how this all translates at the end of the day from a growth rate perspective. So, if you look at America for us on an LTM 1 YoY by about little over 14 percent which is industry leading. If you look at Europe, that grew by 18 percent on a constant currency basis.Q: But Europe on a quarter-on-quarter basis has been flat in this particular quarter, is that because of the one-off that we are seeing in this quarter and do you expect that to stabilize going ahead because some players have expressed concerns that in the next one year it will be slightly tepid?Gupta: We see a very strong pipeline in Europe as well, so I would say the quarter is more backed by two previous quarters of very high growth, so I wouldn’t say there is anything else, it is a one-off. Europe has a very strong pipeline and like I previously commented, their markets like Germany and France, which will open up are opportunities. So, that market will definitely move in that trajectory. HCL, with 18 percent performance on a YoY basis, is leading the industry. If you look at some of the sectoral performance, consumer services, retail, Consumer Packaged Goods (CPG) grew by a little over 25 percent for us, again industry leading.If you look at financial services, they grew by 16 percent. So there is a positive momentum in the market, some driven by churn and some driven by the emergence of a little bit of digitalization coming in as pilot programs over there. As we see some of this translate, we should see a lot more growth going forward.Q: I have got a question on pricing in that case because there has been some indication that pricing pressure is likely to come about in the second half of the fiscal specifically and some players are already experiencing pricing pressure. Has that started impacting numbers? How has pricing been in this quarter and what is your outlook going ahead? A: The pricing, particularly in the Information technology outsourcing (ITO) deals, is more around providing a situation, it is a solution-based pricing rather than just the unit pricing. So far as HCL’s strategy has been to make automation at the centre of the whole ITO deals. So, our execution has been led by automation. As a result we are able to offer very competitive pricing so far as our customers are concerned.