High deal win rates to boost HCL profits

Updated: Nov 29 2011, 08:17am hrs
We summarise below key highlights of HCL Tech management views on demand and margins. Margins made above its guided levels of 14% will be redeployed in the business to drive higher growth.

The investments would be made in sales, solutions/platforms and passing on benefits of rupee depreciation to customers for large long term assured business on select deals. HCL Tech is looking to price new deals at R48-R49 (vs 45-46 earlier), whereby the company makes 14% margin and gives the benefit of rupee depreciation to the client.

HCL Tech would protect itself against future rupee appreciation by taking long term hedges over the deal duration, as getting longer terms hedges is not an issue according to the management. The company indicates this would not be a blanket policy, but could apply to larger transactions which provide 3-5 years of significant visibility or situations where HCL Tech needs to pay entry ticket premium to get a look in. The company is confident that at renewal of these deals, the contract structuring would ensure that they make similar margins even in a rupee appreciation scenario. HCL says it is taking advantage of the rupee volatility by giving customers the benefit.

Increasing fresher proportions is a long term margin lever, according to the company. (HCL Tech has been hiring ~80% laterals in the past, which have over the last two quarters come down to 55-60% levels). HCLT currently has training centre at Manesar and is building one at Nagpur, which will have capacity of 5,000-6,000 people to be trained at one go (completion over the next 3 years). Utilisation including trainees is a marginal lever according to the company and can move up by 100-200bps. Euro crisis and weak global macro is leading to increased outsourcing and higher vendor churn as customers look to cut costs more and fund change-the-business projects from savings from run-the-business projects. We remain convinced about HCL Techs large deal winning prowess and revenue surety stemming from the biggest deal pipeline and better deal win rates than the company is guiding for.

Nomura Equity Research