Will continue quest for acquisitions, IP partnerships: HCL Tech

Vijayakumar said the talk of US curbs on foreign workers did not affect HCL much as it has the lowest dependence on H1B visas.Below is the verbatim transcript of Rahul Singh & C Vijayakumar’s interview to Kritika Saxena on CNBC-TV18.Q: What is the guidance for FY17? Vijayakumar: When we started the year we gave a guidance of 12-14 percent given that there is only one more quarter to go. We are guiding to be in the mid-range of 12-14 percent guided range. So, when we guided we had excluded certain things like Geometric was excluded, subsequently we acquired Butler so that was also excluded from guidance. We did two IP strategic partnerships, so one we are just announcing this time and one we announced in the last quarter. These four transactions were not included when we gave the 12-14 percent guided range. So, now with these four, we believe we will grow from another additional 0.6 to 1 percent depending on when Geometric consummation happens. Q: So, essentially if you take that entire 1 percent contribution you will be able to grow FY17 14 percent in constant currency terms? Can I assume that?Vijayakumar: Potentially.Q: In terms of the IBM IP deal that has been extended you are investing, if I am correct 155 million additionally, so based on the additional partnership that has been signed how much contribution is coming in to the guidance?Vijayakumar: It is a 155 million investment; it is a long-term contract. On an annual bases we believe it will give us USD 45-50 million revenues. We are not specifically calling out what will happen in this quarter because the program has just started. We are more confident of an annual number which is USD 45-50 million from this round of IP partnership. Q: All together for quarter four what is the contribution that the entire partnership with IBM has the earlier one and the extended one?Vijayakumar: It is little difficult to kind of break that down, so given all specific information I think it is very easy for you to kind of detect it. But overall 12-14 percent midpoint of the guidance and another potential 1 percent growth coming from all these four elements depending on the timing of Geometric. Q: Before we go into the margin, anymore acquisitions anymore IP led partnerships which can potentially drive this growth even further beyond a 14 percent mark that you could be looking at?Vijayakumar: We are almost in the one month of the quarter is over so I don’t foresee anything which will have an impact on this year’s numbers. But potentially, we continue to look at opportunities as a part of our \\'Mode-1-2-3 Strategy\\' products and IP partnership is definitely a big focus area and we will continue to do such deals.Q: Margins have seen a significant growth. Analyst were expecting it to be almost 50-70 basis points lower than where you have come in. Can you break up the margin based on the wage hike impact given that the wage hike impact has been stagger and it will continue in quarter four? So based on that can you breakup the margins for us?Vijayakumar: I would just give you the qualitative factors which helped us improve margins, so I won’t break it down in to bps. We came in at 20.4 which is 30 basis points higher than the last quarter. There are two significant drivers to improve margins one is DRYiCE Autonomics framework which is really been delivering practical results on the ground. We had extensively deployed autonomics DRYiCE in our infrastructure engagements. In the last six months we have extended it to our BPO and application services as well. So, that is definitely showing some good positive impact that is one. Second is, if you see, this quarter the growth has been fairly good in all the horizontals. Like infrastructure has grown 2.1 and application has grown 2 percent which is a highest in the last few quarters. Our engineering and research and development (R&D) services has grown 7.1 percent. BPO which was a little soft for a few quarters that has also grown 2.9 percent. So, there is change in mix because of all the service lines have grown. Traditionally, you will see slightly higher growth in infra and lower growth in other areas. So, this change in mix is also driving an improvement in margins. Basically, these two broad factors helped us off set some wage hike impact and little bit of utilisation impact and gave us a 30 percent benefit overall.Q: Last quarter you suggested that margin should be within that 19.5 to 20.5 percent range. So, by next quarter would you maintain that range or is there a possibility of inching margins higher given that next quarter the wage hike impact will be lesser?Vijayakumar: Overall our guidance was 19.5-20.5 for the full fiscal and now that three quarters have gone and we have done fairly well we are really guiding the street on the next quarter which is the current quarter January-February and March. This quarter also we will be within the 19.5 and 20.5, so with that you should be able to fairly estimate the range of the full year. Q: Last quarter you had also said that impact of wage hike on margins for quarter four will be 10 basis points, so do you maintain that or has that reduced?Vijayakumar: I think we said 70 basis points this quarter and 10 basis points next quarter. I think that is a defined number it is not going to change. Of course, there will be other efficiencies and offsetting parameters which will come in to place.Q: If you could specify this time as well as last quarter the financial services growth has been significant can you breakup where you are seeing the growth coming in from in terms of process and geographies?Singh: Our financial services business tends to be North America and Europe these are the essential markets that we service in. We tend to focus on the large financial service institution, so our model has always been that focus on fewer firms but try and have deep relationship with them. We have a client partner model which is working, so we try and see how we can do more service to the same company. We would like to add maybe a client or two every quarter, but we don’t want to have many clients at it, so that is the basic model that we follow. Because the model that we follow our customers tend to be global, so most of our customers will have a US geography presence, Europe geography presence and they will also have an Asia geography presence, so therefore that is the model. So, we see trends which are very similar between North America and Europe.Q: How much has digital contributed to this quarter what is the growth been like, some of your peers have started giving that differentiation?Vijayakumar: We are not calling out on a quarter to quarter basis I think in the analyst conference last year, we said on an annual basis we will be providing some more granular details. So, last year, we said our digital contributes to 20 percent of our application services revenues so it is more or less in the similar range. We will give you a more accurate number when we finish the year.Q: Talking about US are you worried? Is there caution as far as the US market is concerned?Vijayakumar: If you look at our portfolio we have the lowest dependence on H1B visas, but the number of applications that we have applied for this is very small. We only look for very specialised skills and that is where we apply for H1B visa. We adopted the global delivery model at least seven years back where we started creating global delivery centres. We have six large delivery centres in the US where we hire local people and deploy them on our client projects that is one reason why our dependence on visas had come down over a period of time. Now we continuing to strengthen that strategy and I am sure that will de-risk us from any potential restrictive regulations which may come up. Q: Gartner has cut its full year guidance by about 1-1.5 percent which in the long-term is still heavy what are clients telling you in terms of budgets?Vijayakumar: If I look at our client landscape most of them their budgets are at best flat or little bit increasing. That is the reality. Gartner as a much broader landscape if I were to look at the spends of our clients. I would say between FY16 and FY17 it would be more or less the same. If I take top 50 clients it will be broadly the same.Q: Will FY17 be marginally better than FY16 given the fact that FY16 was a tough year for the industry?A: I think we bucked the trend in FY16 and now fiscal FY17, so let us finish the year and when we meet next time we will probably give you a much better shaper commentary on FY18.