The dismal quarter posted by HCL Technologies also saw its operating margins come off to a low of 19.4 percent. But in an interview with CNBC-TV18, President Anant Gupta and CFO Anil Chanana said they expect margins to bottom out now and are holding up the company's fiscal year 2016 guidance of 21-22 percent margins.The next quarter, however, will see a margin impact of 75 basis points, something that played in the quarter gone by also, they added.Speaking about the results, the company management said weakness in India business, though a small part of revenues, impacted the rest-of-world component in the earnings. HCL's Americas, Europe and rest of world revenues grew by 0.7 percent, 5.6 percent and -8.4 percent quarter on quarter.The company's investments into technologies such as digital is paying off and it has won 10 transformational engagements worth USD 1 billion in the first quarter, the management said, adding that such focus would allow it to be differentiated. Below is the verbatim transcript of Anant Gupta and Anil Chanana’s interview with Reema Tendulkar on CNBC-TV18.
Q: For two quarters now, on our margin front, you have operated below your stated margin guidance of 21-22 percent at the earnings before interest and taxes (EBIT) level. Would you look to tweak it lower or change your margin guidance?
Gupta: First of all, we look at our margin profile for full fiscal and I would like to state that our guidance for the full fiscal continues to be in the range of 21-22 percent. If you look at, this is the first quarter for our fiscal 2016 and I believe we have started on a very strong footing. We grew by 30-45 percent on a constant currency basis year-on-year (Y-o-Y) which is very strong for us. If you look at our order book, that also is about 10 percent higher than what we have previously seen and again, largely driven by the quality of the book that we have, one driven by the recurring nature of infrastructure management system (IMS) and information technology outsourcing (ITO) contracts, and second due to the complexity of the engineering work that we do. So, that again is a very strong factor which we have in our – as we see this quarter. And our comfort for fiscal 2016 is really based on those two parameters.
Q: So FY16, EBIT margin maintained at 21-22 percent. If we adjust for the provision of USD 18 million that you have taken a hit this quarter, your margins are 19.4-19.5 percent at the EBIT level. Do you believe they have bottomed out and what will be the drivers which will push your margins up?
Chanana: We started our investment programme somewhere in early calendar 2015. We have significantly made those investments and now we are reaping the benefits of those investments. As Anant explained that our orders book has been higher by 10 percent that has been at the highest level and that is testimony to the fact that those investments that we did in terms of bringing the digital and the internet of things (IOT) as well as creating the global delivery centres is picking off.
So, now going forward, we will be able to, we have the levers which will help us improve our margins and at the same time, we invest in our business.
Q: What are the levers? And again, margins at 19.45 bottomed out?
Chanana: Certainly. The margin will be in the guided range of 21-22 percent for the full year.
Q: This quarter you were aware that three factors will affect your revenues – client specific issues, revenue and infrastructure management and third cross currency. Currency is not in your hands, but of the first two factors, will it affect you in the coming few quarters as well? Any spill-over?
Gupta: The first important thing to look at is the YoY performance even in this quarter for the different lines of business. Engineering grew by a little over 23 percent YoY - that indicates the quality of the growth on a consistent basis, business process outsourcing (BPO) also did quite well and infrastructure delivered around 16.7 percent Y-o-Y on constant currency basis, application not bad at 7.7 around the industry average. So, when you look at any quarter, the way we look at it is comparing it both on a YoY basis, how is it really great for us. So, I would say there is a very healthy growth rate at these different lines of business have delivered and from this quarter perspective, especially given that it is our first quarter for the fiscal.
However, with respect to the infrastructure business again, we as we speak, our transitioning and transforming more than 10 engagements in the different states. They will kick in into revenue, in my view, sometime in the second half of the fiscal for us. But if I look at it from a full fiscal perspective, for the last three fiscals, we have delivered an outperforming performance when you compare the top-three players in the industry and we are extremely confident of delivering that even in this fiscal._PAGEBREAK_
Q: A couple of your peers have cautioned us about the second half of the fiscal year, that is the coming two quarters. Apart from seasonality, do you see any factors which will affect HCL Technologies' performance?
Chanana: I do not believe there is any factor which is impacting us negatively. Seasonality is only sort of limited to India business which comes down in the second of the year. Other than that there is no other seasonality factor and our reliance on India is very small. It is now less than 2 percent of our revenues.
Q: So, was the India business the reason why your rest of the world performance was weak in this quarter?
Chanana: That is correct.
Q: No other factor apart from India which will affect you?
Chanana: Apart from the currency, India was one of the factors.
Q: You spoke about engineering and how it is now turning out to be such a big growth driver. You have announced a small acquisition of Bengaluru based private company. How big is this acquisition? Could you reveal the financial size?
Gupta: If we go back as to what is this organisation, it is really in the semi-conductors, extremely high-end engineering capability in semi-conductors. HCL has a very strong portfolio in semi conductor engineering and it is a competency based acquisition. Sub-USD 10 million, not large from revenue standpoint, but clearly from a capability and the way we see the semi-conductor industry moving, we believe it will be a great fit based on which we can scale-up. And by the way, our engineering business this quarter has become the number three players globally. So, from that perspective, we do believe in making the forward looking competency based acquisitions which we can then scale up across the globe.
Q: If things are looking good, your order booking is 10 percent higher, I believe at a record level as well, what is the outlook, say for FY16. In FY15, on a constant currency basis, you ended the year with 15.1 percent. Without getting into numbers, would it be better, as good as or a little lower than what you clocked-in in the prior year and how would it compare with the industry.
Gupta: Like I said, for the last three fiscals, we have outperformed the average of the top-three and for fiscal 2016 also we will outperform the average of the top-three. That is the only guidance I can give you.
Q: But you have been doing that for the last many quarters now.
Gupta: True. And I think it is an important thing and it is also an element we discussed earlier as well. From our perspective, while the complexity of the deals has been placed and therefore the conversion into revenue has become a little longer. It is only positive sign for us because it is getting us into more complex transformation engagements therefore from an addressable market perspective it is really helping us. So, yes a couple of quarters here or a couple of quarters there, is not the thing but does it really get us kick into some of the engagements which are still in the key markets especially when you look at the dark region which is Germany, Austria, Switzerland or if you look at France and Belgium, they are still largely untapped from our perspective and therefore we believe that engagements in those markets will be complex, they have been complex, they will be complex for a period of time, but nevertheless there is still a significant enhancement of the addressable market that we are playing in._PAGEBREAK_
Q: Could you break up the margin for us if you include the provision of USD 18 million and what will be the impact on wage hike going forward?
Chanana: The wage hike this quarter had an impact of 85 basis points but in spite of that our margins, if you look at EBIT level, went up 20.1 to 20.5 percent.
Q: But that is if you are stripping out the provision here.
Chanana: That is correct. So, even if you bring in the provision, it has only increased. I am just keeping it out for a second just to make an apple to apple comparison, I would say. And so, going forward, it will be 75 basis points next quarter which will have an impact because of the salary increase, but other than that there is a good amount of tailwind which is there where we will be able to, through automation and other measures, be able to improve our margins. If you look at our per engineer realisation, it is the highest, at USD 58,400. So, we believe we will continue to go on that journey.
Q: Your peer has come out with a productivity target, a five year plan of reaching productivity to USD 80,000 per employee. You are at USD 58,400, you just said. What will your target be? How much do you think it can rise to?
Gupta: We have not picked a number, but the fact is we believe in delivery. The last three years, if you look at the realisation per employee, it has been the highest in the industry, actually a good 20-25 percent higher than the industry. Our automation story is not something we have started today, we have started that five years back with our first framework on Management Tools as a Service (MTaaS), three years back they gone for, we call as the AUTOPS, which is for operations and as we go forward, we will add a lot more as well.
So, our journey is a consistent journey. We will continue to build on that. And especially, when you look at the digital environment and look at our investments we have been making in nextgen ITO, that is really what that is targeted at.
Q: On attrition, it has been above the 16 percent mark for the last six to eight quarters if I am not mistaken. Is it going to be the new normal attrition at these levels or do you see it coming down?
Chanana: I think it is the performance cycle, so it has more to do with the performance cycle.
Q: But even in the other quarters it has been above that.
Chanana: It comes down in the other quarters slightly by a couple of points.
Q: But it should stay around this?
Gupta: I would say it is a couple of points higher than what we would like it to be. So, ideal operating range should be in the 14.5 odd percent. So, we would be comfortable in that area. But given that we acquired, we had significant rebadging last year as well, 3,000 on sight compared to before and the changing nature of the market in terms of capability. So, we believe that the right range ideally is around 13.5 percent.
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