Hexaware Technologies on Wednesday said that the company expects margin to grow in-line with revenues

In an interview to R Srikrishna, chief executive officer, said that rupee depreciation will fund wage hikes in Q3 and Q4 and company will not not use it to improve margins in short-term.

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Forex gains for the rest of the year will be materially lower, says Hexaware

Srikrishna said that deal wins are typically higher in second half of the year than first half of the year.

Edited excerpts:

What is your outlook on the margin front, because the earnings before interest and tax (EBIT) margins have fallen from 16.3 percent that you saw in Q3 of calendar year 2016 and now almost at about 14 percent odd? Even this quarter, there was a bit of a disappointment. Should we expect these pressures to continue?

Last quarter guidance, we said specifically that we are going to do a planned reduction in utilisation, which has headwind to margins. We did that in this quarter, because we know there are other tailwinds and we could afford to do reduction in utilisation without impacting profitability. So we did maintain profitability from the previous quarter.

In terms of future, we have provided a guidance that our earnings per share (EPS) will grow by 13-14 percent for this year in dollar terms and higher in rupee terms. But from an EBITDA perspective or operating performance, we expect it to grow in-line with revenues, which means roughly similar profitability – that’s for the coming quarters. What we have done is a planned manner reduced utilisation, which is going to have twofold impact. It allows us to service our clients better, but also in the medium-term, in a two quarter period, will allow us to improve structural cost. So that gives us an opportunity in the longer term to improve margins a little bit, but that is not going to be for rest of this fiscal year.

You referred to your dollar EPS growth guidance of 13-14 percent. If we assume rupee at 68 to dollar then it translates to rupee EPS growth of 17.5-18.5 percent. This compares with 22 percent that you did in H1. So are you guiding slower?

Our forex gains for the rest of the year will be materially lower. We had solid forex gains in this quarter and also in the previous quarter. That will actually reduce substantially going forward.

In terms of deal wins, are you seeing lower run rate per quarter for your fresh deals because in the first half you did see deal wins of around $69 million that compared to $180 million in all of calendar year 2017. Some slowdown visible there?

No. On a year-on-year basis, we are up. Last quarter, we were up. This quarter is flattish, but usually our pattern is more wins in H2 (second half of the year) than in H1. So there is no slowdown.

Give us some colour on margins - your EBIT has fallen from 16.3 in Q3 CY16 to now 14 percent and even in this quarter people would complain that margins were a miss. Gross margins were also down about 120 basis points quarter and quarter – just give us some colour on why and way forward?

Firstly, Q3 of last year is not necessarily the right benchmark, we always have variations across quarters. We will talk about last quarter now and the future. Form last quarter to this quarter, the biggest change we did was to reduce our utilisation, there is also substantial amount of visa costs in this quarter. Those were two big headwinds for margins, whatever you see it is still flat. We will see wage hikes in H2 in Q3 and more in Q4 and usually rupee depreciation ends up funding the wage hike, so I am not looking at rupee depreciation as a way to improve margins in short-term, it is going to fund our wage hikes.

We saw a substantial confident guidance from the likes of TCS. Can you give us some qualitative guidance? Are things improving, digital orders, and orders in any vertical? How would you look at the next four quarters?

We have bumped our guidance from 10 to 12, 12 to 13 and we should bear in mind that 12 to 13 is after losing at least one and half percentage on cross currency as we lost one and half percentage in this quarter. So there is obviously a lot of confidence in growth and that confidence is coming from our existing orderbook mainly, a little bit of pipeline which is very strong.

So, there is just lot of confidence. We wouldn’t up our guidance in spite of substantial cross currency headwind without a lot of confidence in our business.