Amid the gloomy economic outlook, HCL Technologies, the country’s fourth largest information technology (IT) services provider, has posted better-than-expected second quarter numbers. Though the company expects the uncertainty in the market to continue for at least another six quarters, it also sees new opportunities in the form of $47 billion of global contracts coming for renewal in 2012. Vineet Nayar, vice-chairman and chief executive officer, talks to Piyali Mandal on the prospects. Edited excerpts:
As the macroeconomic environment continues to be uncertain, what challenges do you foresee and how are they going to affect your business?
The overall macroeconomic indicators point to negative growth and flat IT budgets. Therefore, growth in existing customers is going to be hard-fought. With liquidity being poor, companies’ ability to invest in their transformation is going to be a struggle. The macro economic indicators of some countries in Europe and countries such as Japan, China and India are going to be a concern and this will impact the business continuity of some of the companies in those countries. And, the currency movements make it difficult to predict where they are heading. Having said that, I truly believe we have an opportunity and a threat ahead of us.
What opportunities do you see in the market?
More customers open to new ideas than ever before. Many vendors are responding to market threats by applying the brake when they should be pressing the accelerator. There are $47 billion worth of deals across 249 customers coming for renewal in calendar year 2012. If the 30 per cent churn continues, that represents a $15-billion opportunity, making me optimistic that growth will continue. I expect the growth to be largely funded out of churn — movement from one vendor to another. From the HCL point of view, we will have to approach a bit cautiously, quarter-on-quarter, and wait for the windows of opportunity to emerge and be free-footed, so that we can grab those as and when they emerge.
For how many quarters do you expect the current volatility to continue?
Six to eight quarters. Whether, it will continue beyond, I don't know. I don't see how we will come out of this before the US elections are over or before the dust settles in Europe.
Can you shed more light on the kind of clients which are switching vendors? Are those clients looking for cost-saving by doing so?
A lot of churn is happening in the Global 500 customer base.They are seeking new vendors with new ideas, new propositions, a new way of approaching a problem. That is opening the market space as never before. The contracts up for renewal are spread across 249 customers, with the likelihood that as many as a third of those might go to new vendors. I think people change vendors because they are unhappy with the service levels and the contract. The churn is coming out of unhappiness and not because of convenience.
Your competitors would also be chasing the same renewal deals up for grabs in 2012. What pricing pressure do you foresee?
The same as existed a couple of quarters earlier. Post recession, prices got re-adjusted to what I call a new normal and these have remained at that level. So, the whole industry has reset itself into new pricing.
You have improved your operating margins this quarter from 14 per cent to 15.8 per cent due to a favorable rupee movement. Do you expect to maintain over 14 per cent margins?
I don’t want to give any guidance. I think the currency is moving at a rapid rate. So, my view is that it is going to be better than 14 per cent. A part of the currency gains would be released in the margins. Other than that, some of the gains will be redeployed in the business and some to fund the hedge losses.
