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HCL Technologies has come under some criticism over the last couple of years because of its dependence on infrastructure management services. The company's responded very well to the challenge by building strong industry verticals and the December quarter shows that revenue growth is now broadbased. Today, revenue growth evenly spread across geographies and verticals. In an interview with Malini Bhupta, the chief financial officer at HCL Technologies, Anil Chanana, talks about how the management is working on a business model that is sustainable and how the company's managed to broadbase growth.
What would you say is the highlight of the quarter?
We are trying to put in place a scalable and long-term business model by focusing different verticals. We are not just relying only on infrastructure management services vertical, which was the case two years ago. Now incremental growth from other verticals is equal to IMS. Growth across geographies is also balanced. While deals worth $500 mn are coming from the infrastructure segment, the remaining deals are coming from other verticals like engineering, life sciences, BFSI (banking, financial services and insurance) and telecom. Industry segments like life sciences are doing very well and growing at 7-9 per cent. BFSI and telecom are growing at 2%.
Engineering is growing rapidly and holds promise. We have an offering in the engineering segment and ability to execute but it may not go the IMS way. In a year, companies spend $1 trillion on engineering services and R&D. Currently, $19 bn is being outsourced. HCL is the fifth largest engineering service company. We have created a service offering in engineering service space, and it is also our heritage. Our clients are blue chip manufacturing companies and semiconductor companies. At present, 17-18% revenues are coming from this vertical right.
How have margins fared during the quarter and why have your net income margin dipped by over 300 basis points?
We have fared well in terms of margins despite higher spends on SG&A (selling, general and administrative expenses) and wage hikes during the quarter. SG&A grew 12% QoQ but we maintained margins despite that. Despite the wage increase, the impact was only 10 basis points on operating margins. Sequentially, net income margin declined as other income had gone up sharply last quarter due to a sale of property. After adjusting for extraordinary income, net income margin is up seven per cent sequentially.
How do you expect 2015 to play out?
Business momentum continues to be strong and we have to identify service offerings in future. Growth will be driven either by tech trends or because of the environment. Europe is going through several disruptions and companies will do a lot more to cut costs. We hope to become a vendor of choice. The tech trend in the US is driving growth. For instance, in infrastructure services we need to provide cloud consulting and we have an offering that can do cloud integration. We have the pieces and offering which can help them implement it. Software as a service is growing faster than traditional industry.
You have seen strong additions to your headcount in the last quarter. Is this likely to continue?
Headcount addition has been strong and this hiring is stronger than it was in 2012-13 and 2013-14. Most of the hiring is happening in engineering segment and digitisation.
Your company's delivered a return on equity of 38%. Is this the peak or is there potential to better this?
We are using small capital base and we do not have India dependency, which is an advantage.
