Hexaware Technologies, which claims to be the fastest organically growing IT services firm, reported year-on-year revenue and net profit growth of 10.3% and 19.5%, respectively, for the quarter ended June. Last week, majority shareholder Baring PE sold 8.4% stake for ₹1,120 crore. The IT firm, however, said this made no change to its future plans. In an interview before the share sale, CEO R. Srikrishna dwelt on prospects for the fast-growing Infrastructure Management (IM) unit as well as the outlook for Europe, among other issues:
Your IM unit grew about 37% in the June quarter. What is working?
The need for IM has not gone away. The ‘how’ has changed. If a foreign vendor like IBM sold services for ₹100 in the early days, offshoring helped reduce that to ₹70. With automation, we can do it for ₹40. For vendors steeped in the IM business for the last two decades, it will go from ₹70 to ₹40 or even ₹0. For me, it is an uptrend. That is why growth rates in general for India-based service providers, have dropped. There is still business moving from ₹100 to ₹70 but not enough to make up for the ₹70 to ₹40 fall. For us, there is a lot of marketshare left to gain.
Can pricing alone help?
If it is a price play then there is no play here. ₹70 becomes ₹40 because of automation. There is also what we call the watermelon effect. A watermelon is green outside and red on the inside. A lot of relationships in the industry are like this. If you see it from afar, it looks green and nice on the outside. But If you understand the relationship a bit deeper, it’s not all great. A lot of customers sign up with high expectations. For the first 6-12 months, things are okay. Cost savings occur, so everyone is happy. In the second year, it is status quo. Come the third year, the good delivery people are all gone to other projects of the vendor. Customers are miffed. We look for customers that are experiencing this watermelon effect.
Won’t the same effect hit you too?
We are fearless about cannibalising our own revenue. If we don’t do it, someone else will. We have proven to ourselves time and again that if we are proactive about cannibalising our revenues, in the long run, the customer will find ways of compensating. You may lose revenue in that project, but you will gain something else. Even if you don’t, it helps win new clients. Every single account of ours has done some form of automation or the other.
How do you measure the gains?
We have a bottom-up innovation programme, called brainbox. In our Youtube channel called BUD, you will see several 100s of videos from our employees about how they have implemented change for clients. 80-90% is to do with automation. This has cumulatively saved $60 million for our customers in the 2.5 years since we started. At $25 million a year, it’s about 5% of revenue foregone.
In our top-down projects, we targeted 41-42 accounts last year to use some form of automation and generate savings for the client. This year our big focus is our enterprise Bot that does a lot of resolutions on its own.
For you, Europe has grown at 25% in Q2. You had talked of a turnaround...
Europe had been doing well, but it slowed down a bit. Brexit would be a positive for IT. A lot of client firms would have to do up a new office, go to a new location. This will lead to a spike in spending. Also, just after Brexit, people put a little bit of a brake on investments. So latent demand will surge now. For many organisations, Brexit would mean setting up an office outside of the U.K. This means new business for the IT industry.
Firms are returning value to investors either in the form of dividends or buybacks. Since revenue growth is falling, isn’t this a good time to conserve cash?
Ultimately, you want to return cash to shareholders… grow EPS… through growing earnings or reducing the number of shares. It’s a good thing to do. I would go one step further, I would take on debt and do a buyback from shareholders. It’s not allowed in India, but allowed in the US. Till now, there was anyway revenue growth and expansion so you didn’t need all of this. Investors are concerned about EPS and dividends. Growth led value is more sustainable.
Isn’t your headcount attrition high at above 14?
It is at an ok level. Does not worry us. Too low an attrition is also a problem.
Companies are stepping away from the bell curve method of staff appraisals. What does Hexaware do?
Theoretically, we do appraisals using this concept but in practice it is loosely implemented. Where we are hard and fast, is at the bottom end of it. What firms need to give a thought to, including us, is as to what level we are implementing it hard and fast. Is it at the unit level or project team level…? Project team level is silly. Even at a unit level, we moderate, so if you have 2 units one of which it has exceeded its goals and the other that has not, you can’t have the same bell curve for both. So we moderate. At the organisation level, there is a need for the bell curve.
