HCL Tech: Deal pipeline at its highest in recent times: HCL Tech


C Vijayakumar, President & CEO and Prateek Aggarwal, CFO, HCL Tech, say the firm
is generating cash like never before, and it has $650 million of free cash flow, after paying for whatever capex incurred during the quarter. Edited excerpts from an interview with Nayantara Rai of ET NOW:

Nayantara Rai: Congratulations on a good set of numbers. I remember, two quarters ago I was asking, are you not being too ambitious about the guidance? You maintained the guidance but now you have narrowed the band down and that too towards the higher end; why the confidence?

C Vijayakumar: We have been delivering very well and we have had some very good bookings in the past few quarters and that is transmitting into revenue. I think when we announced our guidance, you said this is a first, you are going to miss your guidance, you are so optimistic. We not only maintained the guidance but rather raised. We have raised the guidance to 16.5 to 17%, of which 10.5 to 11% is the guidance for organic growth. We have had very strong momentum in all our businesses and that is what is driving this. We hit $10 billion revenue run-rate on an annualised basis which is a great milestone for HCL-ites.

Nayantara Rai: Tell me something, you have one quarter left now, you are narrowing the guidance range towards the higher end; will that allude to the fact that you have a healthy deal pipeline?


C Vijayakumar: Our pipeline is very strong. In fact, it is at its peak and we are very confident.

Nayantara Rai: You mean the company’s history peak or in this year’s peak?


C Vijayakumar: This year. I do not have a good track of many years but it is one of the highest in the recent past. We expect a very strong conversion of the pipeline in this quarter based on all the conversations that we have been having with our clients and that gives us optimism to be at the higher end of our guidance.

Nayantara Rai: It is completely out of your hands, but given the currency situation you are going towards a lot of volatility.


Prateek Aggarwal: But it is not the…

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Nayantara Rai: You have headwinds actually…

Prateek Aggarwal: Currency is not something we worry about too much. We have a very disciplined hedging programme which takes care of it, give or take a few bps here and there. But when you talk about currency, we have a lot of currency flowing in this quarter and I am talking about the solid cash conversion of those revenue and EBIT numbers that the CVK talked about. There was more than $700 million in operating cash flow in this quarter, and for the three quarters cumulative we have delivered close to 110% of the net income. We are generating cash like never before and we have $650 million of free cash flow, after paying for whatever capex we had during the quarter. The net cash balance on the balance sheet is now $1.1 billion and to back it up we have a global S&P credit rating. We have got A-minus credit rating which compared to the India sovereign credit rating at BBB minus, is three notches on top.

Nayantara Rai: It is a proud moment for HCL-ites. Look at the annualised revenue, the cash you have on your books, what about the cash utilisation policy?


Prateek Aggarwal: The $1.1 billion is great, but we will continue to generate much more out of this 1.1 billion. We do have a payable to IBM for the acquisition that we did, the second tranche is due by the end of June this year. So, $800 million will go off in that and we will continue generating more.

Nayantara Rai: What about M&As now? You have relied very heavily in the past also for inorganic growth.


C Vijayakumar: The industry is going through a lot of transformation and this is the time you do all your right investments — investment in the right technology, organically acquire competencies, organically create completely new revenue streams for the future. HCL has always been thinking disruptively, focussing on the products and platform nobody really focussed on, and now 13% of our revenues comes from production platforms at a very high margin. We are always looking out for new ideas, new ways to grow, new geographies. We expanded in Germany, Canada, we focussed a little more in the Middle East, and now France is a big focus area this year. We will continue to look for acquisitions to expand geography, digital capabilities and of course if there are right opportunities on the intellectual property acquisitions side too.

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Nayantara Rai: When I look at the mode-1, mode-2, mode-3 mix, is it according to script?


C Vijayakumar: Yes, it is exactly. We wanted it to be one-third of it and we are at 34%.

Nayantara Rai: Is this the way it is going to stay, you have got the way it is at the moment?


C Vijayakumar: No, I think it will move a little more towards mode-2 because that continues to grow and now it has grown 25% year-on-year. It will increase a little more in mode-2 and mode-1 will reduce as an overall percentage of our revenues.

Nayantara Rai: Within the segments what have been the outliers? Are you seeing more traction now in BFSI or is that still a trouble spot?


Prateek Aggarwal: BFSI continues to be a bit slower compared to other verticals. BFSI has also grown about 4.5% year-on-year but compared with the others growing at 38% and 31%, those are smaller numbers obviously. We talked about one client specific issue and even generally the market has been a little slower.

C Vijayakumar: If you look at the financial services, then on the retail side there seems to be a continued focus and momentum, and there are a lot of fintech companies or financial software companies where we think there will be opportunities. But some of the traditional spaces like capital markets are continuing to be a little bit stretched.

Nayantara Rai: What are the sectors that are doing well for you?

C Vijayakumar: Manufacturing is doing very well. Our public services, energy and utility are doing well. Life sciences and healthcare from a year-on-year basis have almost grown in double-digits. Retail CPG is again a very good momentum. A lot of digital work that we are doing is coming from the retail CPG segment.

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Nayantara Rai: It is going to be an election year, is that going to have any impact?


C Vijayakumar: Nobody can say.

Nayantara Rai: Is it something that you will have to talk about?

C Vijayakumar: Right now our pipeline is strong and we think a lot of good conversions will happen. We have to take it as it comes and I cannot really provide you a view on that now.

Nayantara Rai: The trade war — you will not want to talk about that either?

C Vijayakumar: Yes, it impacts some of our clients and that might impact us but all that is baked into our revenue and EBIT guidance; with one quarter to go not much of variation is really possible.

Prateek Aggarwal: The trade war has started to thaw out a little bit. So hopefully it will get better as it goes to phase-2 and so on so forth.

Nayantara Rai: Is there a change in sentiment, investment ideas, conversions and all of that simply by talking with the client-side?


C Vijayakumar: No, I always look at these questions as to how it impacts HCL, and the best way to look at it is that your pipeline is healthy. Our pipeline now is at one of its highest points in the recent past and I am confident of good conversions in this quarter.

Nayantara Rai: When you say highest, is it higher in quantitative terms or qualitative?

C Vijayakumar: Both; numerically it is the highest in the recent past and in value as well. The best way to look at that is how many deals are in the new age spend. So, every large deal has a significant transformation component which means we are becoming much more strategic to our clients. We are not only just focussed on running the business spend, but we are also engaged with contributing to the transformation of the client landscape and optimising on the run side.





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