Software services provider HCL Technologies has posted a 15.4 per cent growth in consolidated net profit at Rs 572.7 crore in the quarter under review compared to Rs 496.7 crore in the previous quarter.

HCL Tech reported revenue of Rs 5,425 crore in the second quarter ended December 31 2011, up 12.8 per cent from Rs 4,651 crore in the year ago period. The firm's earnings before interest, taxes, depreciation and amortization (EBITDA) margin improved to 18.5 per cent versus 17.1 per cent quarter on quarter. The EBITDA figure stands at Rs 972 crore compared to Rs 795 crore in the last quarter.

The stock was trading up over 3.5 per cent on the Bombay Stock Exchange.

In an exclusive interview to NDTV Profit, Vineet Nayar, Vice Chairman and Chief Executive Officer at HCL Technologies said, “The quarter has been fantastic. Decision making in the quarter helped bag deals. The second half of the year is likely to be better than the first half.”

Anil Chanana, Chief Finance Officer at HCL Technologies said that there has been an EPS expansion of 46 per cent year on year. “Our EPS today is Rs 32, which is the strongest,” he added.

Below is the complete interview. Don’t miss the accompanying video.

The quarter has been very good. You have beaten your own expectations.
 

Nayar: The quarter has been fantastic. We have seen revenue growth, margin expansion, expansion of existing services into existing customers. Our service adoption index is going to 3.4 per cent. We have two more $100 million customers in the kitty. There have been bid wins worth $1 billion in this quarter. Also, the market share has expanded.

You have seen good profit growth; also your US revenues from the constant currency has been have gone up quite significantly. In terms of maintaining the momentum in the current environment, would you say that it is a tough task for you?
 

Nayar: Let’s talk about the environment first. There are opportunities that emerged in the market space out of some plates moving. The plates which are moving in are extreme frustration of global five on their behaviour during recession with existing customers. As those contracts came in for renewal, they were not renewed with those vendors with 30 per cent of them changing hands. This created a market opportunity for us. 


The second opportunity is the Europe is suddenly waking up to recession and admitting that they need to do something. They are opening up a new market. So the amount of deals, which are going to move in into the markets, starting from July is very large. Also, lots of decision got made during the period and hence, we picked up million dollar deals. Therefore, I’m extremely positive. 


Going forward, there are going to be $47 billion worth deals coming for renewal in the calendar year 2012. However, we don’t know whether or not that 30 per cent will hold true for this calendar year. We also don’t know whether the Europe will continue to increase its outsourcing in response to the recession. We don’t know what will happen to the discretionary spend given the environment. So, I’m extremely proud and bullish about what we have done. However, I’m cautious on the opportunities. But one thing we should be assured of that as and when the opportunity emerges, it should be caught.

Winning deals has been your strong point in the last quarter. You won 18 deals worth $1 billion in Q2. This also gives you revenue visibility. But is the pipeline still strong? 
 

Nayar: It’s difficult to say. The deals got done because they were moving away from the existing customers to new customers. Hence, there is a deadline on when the deals should get done. Now we have longer term visibility on the new deals. The second half of the year is likely to be better than the first half as far as deals are concerned. We will have to go step by step. Whatever we have done, will hold us in a good state for the next few quarters.

Anil, let’s talk about the currency. There has been 11 per cent depreciation in the currency in the last quarter. You have a very conservative hedging policy; will you be renewing the same? A report says that in the last quarter you took your hedges up to $1 billion.
 

Chanana: As we have announced billion dollar deals, we thought of hedging ourselves in the long term. We stay put with our policy which is cover ourselves 40 per cent of inflows for next one year. So, my hedge book today is close to $ one billion on cash flow hedges.

 The rupee is at 52 per dollar right now. We may see further depreciation in the currency. Is that something you have thought about or factored in?
 

Chanana: That’s what the policy takes care of. So, it’s a layered hedging policy. So, we will continue to hedge ourselves every month till our existing hedges mature.

What are the changes in models in terms of the deals you are acquiring?

Nayar: If you look at any other reports, they have said that the legacy applications, application development on the standalone basis are going to go down from about 43 per cent of the total IT spent to about 33 per cent. Enterprise applications are going to remain at about 44 per cent and the SAS model is going to go up from 12 per cent to 13 per cent. In terms of directions, it means that whatever you are offering, for example, offshoring service is going to come at a significant challenge. This has to be bundled either as a SAS services, which would need significant investment in asset and data centers, etc. else, you will have to bundle the whole things and participate in the total idea outsourcing. So, you will not lose the negative trajectory of the application development. 


Secondly, there are lots of global vendors, who are losing significant market share to the global five and to the Indian five. And that market churn towards these 10 vendors is a very interesting phenomenon, which is going to drive growth.  So you can track those non-10 vendors and see if you can participate in the vendor churn and take that business away from them. 


The only way to move out of this recession for most of these companies is to lose their cash from the balance sheet and invest in transformation. They need to make b2c investments, multichannel or mobility investments, big data investments, emerging market investments, which can fuel the spend in the IT sector again. So if you combine these thee early indicators on the IT, your business model will have to adopt to total idea outsourcing, discretionary spend in new-generation technologies and focus on vendor churns so that we get more though a stronger acting agent.

Since Eurozone is still grappled with debt crisis, the possibility of offshoring has increased. You have grown 2.7 per cent this quarter. It has been a big chunk in the US. Will the run-rate be maintained?
 

Nayar: If you look at billion dollar deals, which we have done, about 57 per cent is from US and 42 per cent from Europe. That gives trajectory of growth of what is going to happen. That will get muted to whatever happens to discretionary spends. We do not know how the overall growth will be. But 57 per cent happening in US is extremely good. 


Most of deals happened in financial services, in healthcare, manufacturing, which constitute to 81 per cent of billion dollar happened in this segment. You will see significant growth here. Europe in financial services and Europe in Healthcare is big driving force for that growth to happen. So, I’m not worried about the growth strategy. Whoever decides to buy whatever, we will be there at the doorstep at that time. 


If we look at this quarter in an interesting fashion, infrastructure has been driving growth. This time the revenue slowed down because of multiple reasons. ERS and enterprise application both registered a 6 per cent plus quarter on quarter growth and delivered 3.7 per cent sequential growth in constant currency. So this business model has service lines and depending on the environment, two or three of them can fire and that can deliver growth. This is what is unique about HCL.

Anil, can you comment on realizations?
 

Chanana: The constant currency growth has been there in the quarter in terms of realisations. It is about 2 per cent, but it has nothing to do with pricing. Pricing has remained flattish.

What is the hiring environment?
 

Nayar: There is a small drop in the utilization, but we are comfortable in terms of utilization, it is slightly ahead of 80 per cent. Since we don’t give guidance, I would like to say that in the last quarter we added around 34,000 people.

 What about sectorial performances?
 

Nayar: I’m glad that infrastructure took a setback so other service lines could shine. The sector will pick up in JFM quarter. 

What about telecom and BFSI?
 

Nayar: We are not seeing any major opportunities in telecom. We don’t see telcos doing something significantly different, which will create an opportunity for HCL. Hence, growth has not been as high as expected in that segment. We believe that BFSI in Europe is undergoing a significant change. They are considering a new set of vendors. Therefore, there is a lot of vendor consolidation, vendor churn. We have won 4 new BFSI customers. It is constantly adding new clients to HCL.

How are you planning to take your acquisition strategy to a new level?
 

Nayar: Our cross-sell and upsell strategy has worked extremely well. If you take our top 10 customers, all of them are G500 or Fortune 500. In fact, five out of them are G200. So, this is an indication that the quality of customers has improved, cross-sell and upsell have improved. Also our ability to participate in transformation at the CEO level has improved because of Axon. So we have three to four ways of entering the door. Transformation is one way, running the business is another way, BPO is the third way and infrastructure is the fourth way.

Can you please elaborate more on BPOs?
 

Nayar: BPOs are on track. We are making investments in BPOs. BPOs have been a significant part of the deals we have announced. We will continue with BPOs and even break even.

What’s your strategy for Japan?
 

Nayar: We still don’t know what is going to happen as far as Japan is concerned. We have a very large exposure to discretional budget in Japan. Post-earthquake, Japan’s reaction has become different from customer to customer. We need a few more quarters to decide on the same. I’m neutral on Japan at the moment. However, we have won a significant deal there in this quarter. 


As long as India is concerned, the currency has made some deals unattractive, which we had planned to make. We have to re-think what we want to do. Hence, there is a pause on India because of the currency situation. That’s the reason I call India soft for the time being unless we figure out a way to handle these fluctuations.

What kind of a growth trajectory are you seeing since most of the deals are coming to run the business rather than your additional discretionary spends? 
 

Nayar: The discretionary spends are muted, they are under pressure and they will be flattish or will trend negatively. Today the market is about running the business. This concept will exhaust itself because it is coming out of churn and not growth. And people will start investing back in the business because that is the only way they can grow. 

So, HCL allows itself to have a balance growth because irrespective of how the markets behave, we are able to match up with the service lines we have. 
 

Chanana: It has been an excellent quarter. The earnings per share (EPS) expansion is also happening, which is getting unnoticed. We have had an EPS expansion of 46 per cent year on year. So our EPS today is Rs 32, which is the strongest. Also, a number of the 100 million plus customers has tripled. We have a resilient business model.