IT service provider Hexaware Technologies reported a consolidated net profit of Rs 39.6 crore for the quarter ended December 2010 (fourth quarter), down 5.7 per cent as compared to Rs 42 crore in previous quarter.
Its consolidated net sales went up by 6.4 per cent at Rs 299.6 crore from Rs 281.7 crore (QoQ). Its earnings before interest, taxes, depreciation and amortization (EBITDA) margin improved to 11.2 per cent versus 8.5 per cent (QoQ).
PR Chandrasekar, chief executive officer and vice chairman of Hexaware Technologies said that the company is confident of achieving 25 per cent revenue growth in CY11 (calendar year 2011).
Below is a verbatim transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.
CNBC-TV18: You are guiding to a 25 per cent growth for next year. Can you take us through whether it is at least 25 per cent and you have a reasonable chance of delivering growth which is 30 per cent plus as well in FY11?
PR Chandrasekar: We have said we are confident of at least delivering 25 per cent and Rs 290 million. We are hopeful that we can exceed that.
CNBC-TV18: You have also eluded to double digit margins, what is double digit? You are already 11 per cent this quarter, is it low double digit, is it 10 per cent,15 per cent, can you give us a little bit more clarity?
PR Chandrasekar: There the reference was to the EBIT margin. We are about 11.5 per cent on EBITDA. On EBIT, we are at about 9.3 per cent. So, we are saying that we will hit 10 per cent EBIT margin which obviously means even higher EBITDA margins in quarter one. We hope to sustain and improve on that as the year progresses.
CNBC-TV18: Even the jump on EBITDA margins is quite strong sequentially. Can you just walk us through what has aided this jump to 11 per cent for you this quarter?
PR Chandrasekar: It has been a pretty good quarter all around. Our revenues grew up. So, in that sense as a percentage our SG&A dropped. Our gross margins also improved by a percentage point over the last two quarters to about 34.5 per cent now. SG&A dropped and we improved the productivity of both our people.
Our utilisation went up by a percentage point. We increased offshore bill rates by 1.7 per cent sequentially. So, in all bill rates, gross margins, SG&A down, resulted in better EBITDA and better operating margins.
CNBC-TV18: The criticism for Hexaware in the past has been the fact the client mining has been quite poor in terms of your new clients or your existing clients. Can you give us a sense of the sizes you are now been able to catch?
PR Chandrasekar: Very good. I do not know whether it is fair criticism. We do have I agree 50 million dollar customers. The good news is that the top ten now contribute 50 per cent of our revenues. The growth has been fairly broad based. Frankly, that is the reason why we have been able to sustain good growth over the last three quarters. Actually, our growth has been double digit compounded quarterly growth rate (CQGR) since quarter two because it has been broad based.
We expect other geographies to come in. We have introduced key account mining capabilities and horizontal and domain specialist in to the field. If you really look at the last couple of quarters that has significantly improved. We have now two customers beyond the $20 million mark for beyond the $10 million mark. Seven in the $1 to $5 million range. We are continuing to progress in that region as well.
CNBC-TV18: I was going to ask you about that. The big deal pipeline because you recently unveiled a five year $100 million plus deal in that $20 million plus bracket which would qualify as a big deal for you, how are things progressing? What kind of traction are you seeing?
PR Chandrasekar: Actually, there also it has been a fairly good healthy pipeline. We have about six deals in the pipeline across the geographies and in multiple verticals. In that context as well the pipeline looks healthy. In addition to that, the pipeline for somewhat smaller deals in the sub five million dollar category which again is pretty critical and adds to our critical mass is also fairly healthy.
CNBC-TV18: So this margin improvement that you are talking about for next year is it largely going to be on account of higher volume growth that you expect or are there some levers which you can utilize to nudge it into double digits?
PR Chandrasekar: We do have a fair amount of levers in the sense that margin growth will have because our SG&A will come down. We also have levers in terms of our offshore to onsite ratio. We currently have an onsite offshore of about 60:40. I think, there is some room for improvement there. We do also find that the pricing has firmed up. Our onsite prices has held steady. We have shown some increase in offshore pricing.
We are continuing to ask for price increases from our existing customers. New customers are coming in at better pricing so there is some leverage there. We have also inducted close to 540 fresher’s into our system over the last one year. Many of whom are extremely productive. We will continue on that trend. We are going to add close to 1,500 people in 2011.
The plan is that at least 700 of them also will be fresh engineering graduates. This will improve our bulge mix and allow us to further improve our gross margins. So, there are some good levers which will give us the confidence that we can continue to deliver decent margins.
CNBC-TV18: Actually these issues that you lined out are the very same reasons that your margins remain so depressed, high attrition, high SG&A cost, high onsite exposure you are confident that this 10 per cent EBIT rate is sustainable for the rest of the calendar year?
PR Chandrasekar: Yes. I guess. I look at the glass as half full not empty. So we are very confident of showing improvement. We have inducted these fresher’s. Our pricing has gone up. Our volumes have gone up. We do not need to have or we have from an infrastructure stand point whether it be senior management team, sales force, our facilities. We have a fairly good adequate capacity.
We have invested in the future over the last 18 months despite the pressures in the market place. Therefore, I think the time is now for us to reap some of these rewards.
CNBC-TV18: What kind of budget spends do you see this year which is buttressing this 25 per cent volume growth that you are guiding to?
PR Chandrasekar: What we are seeing is two fold. One is at the macro economic level which is, North America continues to remain strong. We are seeing as the first quarter where unfolds. We are seeing signs that spending is continuing to increase. Yes, it is not the kind of stratospheric but at least single digit increases in budget spends. More importantly, our top-line are investing more in programes because they need to do that. They have not really done that much over the last couple of years.
At the company level, we are seeing Europe beginning to look up for us. This had been a source of some drag over the last 12 months or so. We are confident that quarter one Europe will look better. A pack also is showing signs of activity which is about 6 per cent for us.
As a revenue base it is small but still even Europe grows, A pack grows, North America continues to remain strong. Our key niche areas are showing some healthy pipeline. This is the reason we are feeling comfortable with guiding to a healthy growth in to the next year.
CNBC-TV18: You are okay on the forex front given the hedges that you have opened. One should not expect any shocks next year from unwinding of those hedges etc?
PR Chandrasekar: Yes. I guess that is a good question. Because it had been a drag on us for almost couple of years. The good news is on two fronts. One, as of September quarter the toxic hedges which dragged us down are completely gone. We now have no hedges in the past as bad rates.
Not only that, looking better is the fact that, we have got a good hedge. We got about 130 million dollars in forward cover at 48.25. We got about 16 million euro at 71.2. So we are well covered for. These are tapering in terms of over the next 8 quarters with significant coverage for 2011. So, I think from a forex stand point we are actually very well covered.
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