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Hired 4000 employees in Q1; expect better utilisation: HCL

Midcap IT player  HCL Technologies delivered a mixed set of Q1FY15 earnings with topline missing street estimates. Speaking to CNBC-TV18’s Reema Tendulkar about the company’s performance and the way ahead, CEO Anant Gupta and CFO Anil Chanana said that the company remains focused on management of working capital and free cash flow generation. HCL will continue to invest in segments like ITO, engineering services and emerging digitalization, they said.

The software services exporter reported a net profit growth of 2.1 percent sequentially (up 32 percent Y-o-Y) to Rs 1,873 crore in the quarter ended September 2014. Revenue in rupee terms climbed 3.7 percent quarter-on-quarter (up 10 percent year-on-year) to Rs 8,735 crore. Its dollar revenue rose by 1.85 percent (up 13 percent on yearly basis) to USD 1,433 million from USD 1,406.9 million during the same period.

HCL added 15 Fortune 500/Global 2000 clients in Q1. The company hired around 4,000 employees in Q1FY15 and expects utilisation rates to improve in the next few quarters.

Below is the transcript of Anant Gupta and Anil Chanana’s interview with Reema Tendulkar on CNBC-TV18.

Q: How has this quarter been for you?

Gupta: The quarter has been another quarter where we have delivered consistent performance. We grew by 3.2 percent in constant currency sequentially. So I think it was a good quarter. If you look at it from where the growth came in, engineering services delivered 8.1 percent sequentially, look at global infrastructure services, it has delivered 5.2 percent, if you look at entering system integration that delivered a little over 5 percent. Overall, software service has delivered 3.1 percent. So I would say it has been a good quarter, consistent performance over the last four-six-eight quarters. So another quarter of good performance.

Q: Let me talk a bit about infrastructure management services (IMS). That has been the dominant revenue growth driver for the company so far. In the last few quarters, we have seen a bit of a sedate performance, can the company go back to its historic growth rates of high single digit in infrastructure management services?

Gupta: The global infrastructure services grew by 20 percent year-on-year (Y-o-Y), so I think the performance is industry leading. If you take the quarter in perspective, it has been a little over 5 percent, so 5.2 percent.

One of the reasons why we have highlighted the global infrastructure services is because that is largely the portfolio which is driving the IMS platform. So even if you look at the infrastructure services division (ISD) commentary and deal renewals and market place, that is where the real market is right. India for us contributes less than 3 percent and that is largely a system integration or a project centric market and we have always said that we will be selectively participating in that market largely public sector and government driven. So we continue with our strategy, no change over there.

Q: Even that is a growth of 5 percent versus the 9-10 percent that you used to earlier clocking. Can you go back to that 10 percent growth rate in IMS?

Gupta: As the markets move, we will definitely be there. I think 5 percent sequential growth is a phenomenal growth, 10 percent is of course superlative.

Q: This year TCS reported that.

Gupta: The way to look at it is not to look at it on a Q-o-Q basis. I think we should look at all these businesses on yearly performance because these are large scale IT Outsourcing (ITO) deals and then therefore they will have their own milestones to get complete it from a transition perspective, transmission perspective and I have always said that the way to evaluate that business is on a Y-o-Y basis.

Q: It is another record low in terms of selling, general and administrative (SG&A) as a percentage of revenues. Can you tell us what percentage of SG&A is on account of G&A and what percentage of that is on account of sales and marketing (S&M) because you have been highlighting the difference between the two and secondly, can you continue to rationalise G&A, is there any headroom available?

Chanana: Let me first give you a perspective on SG&A before coming to the other specific questions. One is we continue to invest and we will be only accelerating our investments whether it is in terms of global delivery centres or whether in terms of creating the competency centres, you would have seen this quarter we hired close to 4,000 people. So we are taking space, so all that we will continue.

In addition, the currency impacted. So because of the currency, the numbers looks slightly better. Some of the professional charges, which we are incurring earlier, those programmes we closed and decided on our go-forward strategies. So those came to an end this quarter. However, going forward, there will be expansion in terms of sales and marketing because we are already committed to that.

Q: What would be the increase in S&M cost?

Chanana: Since we don’t guide, I am not giving you a number but it will certainly go up.

Q: What is the breakup?

Chanana: Half-half almost. 50 percent is S&M and 50 percent is SG&A.

Q: Can you continue to rationalise G&A further?

Chanana: I think there will always be opportunities but as I said, the investment will be much more.

Gupta: Even if you look at G&A — we have just announced creating another near-shore facility. So while we continue to optimise and consolidate some of our G&A and facilities within India but at the same time, we continue to expand on near-shore and onshore centres given the nature of the business and the way it is moving.

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