HCL Tech has registered Q2 EBIT growth at 42% year-on-year led by a slew of deals that the company managed to garner in Q2. Speaking to CNBC-TV18, the management says that HCL Tech won in excess of USD 1 billion over 18 deals in the second quarter. “In fact, HCL Tech has recently bagged four new clients in Europe due to vendor consolidation,” Vineet Nayar, vice chairman and chief executive officer of the company says. Anil Chanana, CFO says that deals worth USD 47 billion are up for renewal in CY12 for the entire industry.
Most of the growth for HCL Tech is driven out of US and Europe. “The environment continues to be volatile and uncertain,” the management say adding, “However, the eurozone crisis has not hit the company’s financials.” HCL Tech has rather benefited due to currency swap. The CFO says that HCL has seen currency benefit of nearly 250 bps in margins.
Regarding business in India, Nayar says that India infrastructure has become unviable due to rupee depreciation. “Nonetheless, we will continue to be in the upper quartile of industry growth overall going forward,” he says.
Below is the edited transcript of the interview. Also watch the accompanying videos.
Q: You had said earlier that October-December will be a big quarter in terms of deal wins and for setting the deal landscape what did you come out of it at the end of the quarter?
Nayar: It was exactly what I said it would be. Significant amount of decisions did get taken this quarter and HCL won in excess of a billion dollar across 18 deals. As I had anticipated, there are couple of factors which are driving the overall IT spent. If you look at any of the industry analyst projections they are saying that the overall IT budgets are flat or tending to downwards.
There is a churn happening in the market space whenever the deals are coming in for renewals, 30% of them seems to be going to new vendors. There is a growth in emerging markets on discretionary spend. The churn was what was driving the O&D spends. The churn has a definitive ended because it has to move from one vendor to another. Therefore the O&D decisions did take place and fortunately HCL came on the top on winning the significant part of the churns which came through our way.
Q: Any sluggishness in the infrastructure services area which has been pointed out by some of your investors that that might have lagged in the quarter?
Nayar: Actually infrastructure business has grown. The global infrastructure business has grown more than it grew last quarter. However, because of the currency depreciation in INR, the India business of whatever projects we were fulfilling suddenly became unviable. Also whatever bids we had put in especially, in the government sector became unviable because there was so much movement in the currency and so we paused.
We are renegotiating our current stance with our vendors, customers to try and see if we can do a better deal. That is the reason the India Systems Integration (SI) business went soft. The infrastructure global business outside the India SI business outgrew its growth last quarter. We also believe that including the India SI business, we will be back to old growth rates.
Q: What the markets liked particularly about your numbers is your onsite volume growth of 5% plus. Do you think it is a sustainable matrix that you can clock something in the vicinity of 5% volume growth quarter on quarter?
Nayar: I can’t say that. We do not give guidance for the future. But, we are in a very uncertain and a volatile environment. The reason you are seeing growth from HCL is because it is churning from one vendor to another vendor. This is not the market growing. Therefore, there are lots of significant amount of uncertainties in the future in terms of that churn. To give an example, there is USD 47 billion worth of deals which will come up for renewal in calendar year 2012. If 30% rate which we saw in the last year continues to be moving from one vendor to another, then you are talking about USD 15 billion worth of deal which has suddenly arrived in the market as an opportunity size and you would see significant booking happening.
If the churn comes down from 30% to the original 5% then we are struggling to create a market as we were struggling in the calendar year 2009. So, the right step forward to the market is to take it quarter by quarter to see trend by trend and as and when any opportunity opens up, to be fleet footed about it and to go and crack those opportunities. It is very important at this juncture, whenever there is an uncertainty, to keep focus on booking. If you keep focus on bookings, the billing will automatically happen. There is one other trend which is very interesting with reference to Europe, which is going unnoticed that the financial services institution in Europe which had largely shut its doors to new vendors like HCL have started vendor consolidation in a very big way.
In the last quarter plus the 15 days of January we have grabbed four new customers in the financial services sector in Europe which were not the customers of HCL, purely out of the vendor consolidation happening. So, my view is that overall IT spend growth rate is not going to happen for some foreseeable future. However, there will be opportunities which will emerge because of different behaviours of the customer out of economic uncertainty. If the companies are fleet footed about grabbing those opportunities and converting them into revenues, then you would see growth.
Q: What is your outlook for 2012? I am not asking for HCL guidance specifically but generally what do you see for the industry because everybody is being talking about tepid or flat budgets, but you are saying that you could still grow if you can grab business from one of your competitors – is it a difficult environment that you are wading through right now, more difficult that what you saw in the previous year?
Nayar: Actually, interestingly it is less difficult. The reason is that the customers are joining the market unhappy with their current vendors. When you see a 30% kind of a churn the customers are univocally saying that I am unhappy with my current vendor.
The second things is, the customer arise with a definitive date of decision because he has to move from his current vendor to another. Thirdly, we know the size and scale of the market which is USD 48 billion. We did not know how much will churn. Therefore, an unhappy customer to convert him into a new vendor is a much easier than the first time outsourcer who may buy, who may not buy and there are lots of internal issues in terms of taking that decision.
I truly believe that the market from a total IT outsourcing perspective is far easier than it was when the markets were growing. Having said that, on the discretionary side which 50% of our business is the market is much tougher. This is because it is difficult to protect, the customers reaction to discretionary spend is varying from being frozen to making decisions and then stopping, not making, not going ahead with decisions. On the discretionary side, the market is much tougher and on the run the business side the market is much easier than it was before.
Q: Just come in on the foreign exchange bid that was maltose in the current quarter. How are you guys approaching it now given what has happened in the quarter which is of course benefitted your margins in the reported numbers?
Chanana: That is correct. The margins have certainly benefitted and as a result you see margin expansion at all three levels- the gross margin, EBITDA and EBIT level- of 150 basis points. What we are doing is essentially a layered hedging policy where every month we hedge, and through this layered hedging policy, we cover 40% of our inflows for the next one year. We have signed a billion dollar of deals and to support these long term contracts, we have also gone for long term hedges. So our long-term hedges are about Rs 450 million and the residual are one-year hedges.
Q: If you strip the margin improvement off the currency tailwind this quarter, have you seen any other core matrix in terms of improvement in the margin trajectory?
Chanana: What has happened is that about 260 basis points improvement came because of the currency and we made investments in terms of the increments which were due in this quarter -the milestone bonus we had announced. Also you would see, we have stepped up our peddle on the SG&A which is in cost and currency terms this quarter. That is 14.9%, and that there were efficiencies which were realized from the business. So all put together have led to a gain of 150 basis points which has been reflected in the margins. The beauty of the model is that you would also see that in this quarter we have recorded 46% growth in the earnings per share. So in rupee terms, earnings is close to Rs 32 this quarter.
Q: Would you still say without going into specific numbers that given that you are strategy is to try and get away business on the churn you can still continue to deliver or will deliver industry leading volume growth in the quarters ahead?
Nayar: Of course yes. We have delivered. If you see calendar year ‘11, we have grown by about 27% year on year which is industry leading growth. We believe that HCL will be in the upper quartile of industry leading growth which you will see from the Indian service provider. That is largely because of our diversified portfolio.
If you look at this interesting quarter, infrastructure did not grow which was a bellwether of growth. At the same time, the enterprise application grew at 6.5%, the engineering grew at a rate The America and the Europe joined in the growth rate while Asia did not grow.
The diversified portfolio we have, I truly believe that irrespective of the market condition, HCL would be able to deliver amongst the top-end of the growth rates among peers… not the highest, but amongst the top end of the peers because of its business model and effective execution of that business model.
Source:http://www.moneycontrol.com/news/results-boardroom/39dealing39the-besthcl-tech-clocks-42-ebit-growth_652388.html
