Wage hike to impact Q3 margins by 70 bps, Q4 by 10 bps: HCL Tech

A hike in wages is going to impact HCL Tech's FY17 third quarter EBITDA margins by 70 basis points and the fourth quarter by 10 basis points, says C Vijayakumar, President and Chief Executive Officer, HCL Tech. The second quarter margins declined 80 bps due to wage hike.Vijayajumar is concerned about the clients' IT spending. He says the spending has remained static or has only marginally improved.The IT giant will be the industry leader in organic growth once it acquires the Butler America Aerospace. The acquisition will be completed by December 31, 2016. Below is the verbatim transcript of C Vijayakumar and Anil Chanana’s interview to Reema Tendulkar on CNBC-TV18.Q: What all does the revenue guidance include?Vijayakumar: 12-14 percent revenue guidance includes approximately 160 million of Volvo and 30-40 million of our intellectual property (IP) revenues. We called out even last quarter that Geometric is not included and we have today announced an acquisition of Butler Aerospace which is a niche provider in aerospace defence; that is not included in our 12-14 percent guidance.Q: The Butler is expected to close in December of 2016 so there is a possibility revenues could come in, in the January to March quarter boosting your guidance, right?Vijayakumar: We expect it to close by December but there could be some changes. However, if it closes, obviously it will come into your January, February, March quarter.Q: What the street also wants to know and has started worrying is the Indian IT growth story. This year is looking good for HCL Technologies of course boosted by acquisitions, but do you think this kind of growth rate, 12-14 percent on constant currency terms is sustainable even say next year, what is the sense that you are getting?Vijayakumar: First is, I do believe our organic growth is also going to be industry leading. The overall is 12-14 percent but organic growth would be industry leading. I know there is a lot commentary about IT industry and lot of pessimism on what is really expected to happen. I for one remain very optimistic about the industry.The way to look at this is, one is to look at all the macro factors but all macros are USD 20-30 trillion kind of factors. To translate them into quarterly revenues and annual guidance, all of that is a theoretical exercise. However, the most practical and pragmatic way to look at this is what is happening to your clients IT spend. If you look at all commentaries, client IT spends are remaining either static or marginally growing.So, in this scenario where the spend is static or marginally growing, how can you get a higher share of the wallet and how can you have your unique and differentiated offering which will help you to capture this incremental spend. I think that is where we are differentiating.Our Mode 1-2-3 growth strategy that we had articulated, it ensures that we provide a very optimal, very autonomic and orchestration for the core services like infrastructure and application services and our motto is all about business outcome oriented.Q: We understand Deutsche Bank is one of your key clients, has there been any impact, what is going on there?Vijayakumar: I am sure you know everything because it is all in the public and Deutsche Bank is a very valuable customer for us.Q: Is it your top client?Vijayakumar: We don’t want to specifically comment, it is a very large client for us and our relationship is very strong. We are helping them in a number of areas. So, far we have not seen any specific impact. If and when we come across something, we will absolutely kind of let the market know.Q: Brexit, have you see any impact whatsoever?Vijayakumar: No, not really. If at all there is an impact, there are lots of conversations about cost out in some of the companies which are preparing for Brexit. However, it is early days, I really cannot say there is a specific impact.Q: Will margins for the full year be closer to the top end of the guidance? Given the track record you have had in the first half which is when you normally have your wage hikes which depress your margins, should we pencil in closer to the upper end?Chanana: We still have a wage hike impact to come in the October to December quarter which will be about 70 basis points and in the last quarter 10 basis points. So, I will stick with the guidance which is 19.5-20.5 percent at the moment.Q: What about attrition, it has gone up for another quarter, is that worrying you?Vijayakumar: Yes, a little bit of concern on attrition because it has gone up. However, we have to keep this perspective that this is the quarter where we had wage increase for a very large part of our employees. So, during this part of the year, there is a little bit spike in attrition. However, we are continuing to focus on training and re-skilling our people which I believe is the biggest sticky element for employees to stay back and we are very focused on that.