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Vineet Nayar | Our growth story is one of margin expansion not dilution

Vineet Nayar | Our growth story is one of margin expansion not dilution
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First Published: Tue, Oct 18 2011. 11 10 PM IST

On track: Nayar says the company will be able to deliver the margins it is targeting. Photo: Priyanka Parashar/Mint.
On track: Nayar says the company will be able to deliver the margins it is targeting. Photo: Priyanka Parashar/Mint.
Updated: Tue, Oct 18 2011. 11 10 PM IST
New Delhi: Shares of HCL Technologies Ltd slumped 8.58% on the Bombay Stock Exchange on a day the bourse’s benchmark Sensex declined 1.63% after the software services company’s second quarter sales fell short of expectations despite volume growth of 5.1%. Vice-chairman and chief executive Vineet Nayar said in an interview that HCL expects many deals in the current quarter but the business environment remains tough. Edited excerpts:
The street is a little disappointed by the show this time. It had expected better volume growth considering HCL is willing to trade margins for growth.
On track: Nayar says the company will be able to deliver the margins it is targeting. Photo: Priyanka Parashar/Mint.
HCL has expanded its margins in the last three quarters, and it has grown as well at the same time. So if analysts say we have grown at the cost of the margins, I don’t know what they are talking about. In this quarter, we again expanded our margins, despite the salary increase impact of 300 basis points (three percentage points) and we have grown too.
So the margin expansion story continues and it’s not a margin dilution one. From a growth point of view, we have grown at 5.1% in constant currency or 8.2% in INR (rupees), which is more than TCS and Infosys, two companies who have announced their results so far.
What do you attribute the current volume growth to?
I think you are seeing run-of-the-business (non-discretionary) activity in the market at its peak. You will see change-the-business (discretionary) activity at its peak starting January, but that is subject to the environment continuing where it is. If it deteriorates, companies will release the run-of-the-business saving into P&L (profit and loss) rather than investing in change.
This is exactly what happened in 2008. They saved a lot of money and they did the deals and then the run-of-the-business went down. That’s why I am telling my team to extract as much as they can now because then the doors will close. And this quarter, we have demonstrated a 5.3% growth rate quarter-on-quarter on our top five customers. So, this is our business model—go in and expand.
Infosys has said there is some slowdown in decision-making.
Right now there is no slowdown in decisions for us.
What about pricing pressure?
Yes, there is pressure, but the pricing environment has changed all through the recession. There was significant restructuring of contracts in 2009; after that we have not seen a second wave of restructuring of the contracts, that is in old customers. In the new set of customers, the competition will only increase.
We have demonstrated a 1.2% growth in realization quarter-on-quarter in such a tough economy and we are the only ones because we believe that you can go into the contract and then squeeze the margin out. So margin pressures are there, but, I think, we will deliver the margins we have set our minds on.
You spoke about the information technology model shifting towards more onsite work, but out of the $230 million of capital expenditure earmarked for this fiscal, most of it is going into India expansion.
I think you have to make a distinction. In America, you don’t have to build buildings; you hire them, and they are available very cheap. In India, you don’t hire buildings, but build them.
I may see significant growth coming from onsite, but I don’t see significant capital expenditure there. Our industry has to invest in power, water, roads, so the capital intensity of our industry is very, very large.
surabhi.a@livemint.com
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First Published: Tue, Oct 18 2011. 11 10 PM IST