Hexaware Technologies Limited analyst Q&A

First question is from the line of Ankur Rudra from JPMorgan.

Congratulations on the first quarter. So just a question, clarifying what's the organic growth for 4Q? Because I understand there was an impact of an acquisition, if you can clarify that to start with. Secondly, if you can talk a bit more about the broader demand environment you're seeing, especially with regards to the budgeting cycle in your top 30, 40 clients. Any color on discretionary spending that's coming through?

So, Ankur, I could speak to you. I think there's 2 -odd percent of acquisition impact on a year - on-year growth for Q4. So the 18-odd will come down to 16-odd. So that's on the first question. I think on budgets, there's clearly some uncertainty. And I'll say just remove the current uncertainty cycle for a second, okay? I think prior to this, there was certainly some modest positivity. And prior to this say, two, three week period, my expectation was that positive will kind of directionally continue. I would still say the positivity is largely true in multiple sectors, okay? Financial Services, especially banking Financial Services, I think, continue to be in that direction. There's more -- a lot more uncertainty in industries that are first order impact of tariffs. Of course, eventually, second order impacts will also become -- come into play. But first-order impact of tariff industries, there is more uncertainty, which is for us, Manufacturing and Consumer.

If you could elaborate a bit more, Keech, in terms of the impact, is the customer reaction to this uncertainty, any kind of freezing of programs which previously were decided? I mean, just talk us through in terms of how you see this play out right now and how it may play out going forward?

I don't think we are yet -- there's sufficient time that has passed for us to know or understand the full impact. Everybody is kind of watching a whipsaw effect on a daily basis, right? I'll also say one more thing to what I said, right, that there are customers who at the beginning of the year kind of said, hey, I know that I'm going to reduce spend. However, I actually want to do more with a lesser number of partners. That's the reason I'm going to undertake a consolidation exercise. And like I said, two have been completed and two are in works. The two which are in works are where we have virtually no presence. So in that scenario, we have challenges all upside. In the two that we won, they were both downsides and upsides for us. We were fortunate to end up on the upside. But the point I'm saying is, yes, there are clients who said here, I'm going to reduce spend but increase with a smaller number of vendors.

Understood. Just one last question. In terms of your capital allocation plan. How are you thinking about M&A with the cash on the balance sheet? And what kind of sizes of acquisitions are you likely to be looking at? There's been some news flow about a very large acquisition, if you can comment on that one at all.

I won't comment on the news. But I think it's fair to say that we have an active corporate development program, M&A program that has a pretty solid and active pipeline. And at any given point of time, we're looking at deals, and we have some bids in.

The next question is from the line of Umar Manzoor from Allianz Global Investors.

I just want to ask two questions. One, is away from the business uncertainty itself. Do you see any risks from the -- in the U.S. from just the U.S. policies basically in terms of not just visas, but just general made in America stuff? That's one question. The other is, if you could comment at all on the plans for the bond as a shareholder. I'm not sure if that's within your scope to comment? But that's my second question.

So I'm not sure I fully heard the second question. Would you repeat that?

Concerning the bond as a shareholder and what's the plan for that?

Yes. So yes, I'll kind of not address that in this call. We do have it's a public bond, so we do have calls on that. So if you join that call, you could kind of hear more on that. On the first one, I don't think that legal immigration is a topic of discussion currently. In fact, I think the administration is clearly thrown its support for the most part behind H -1B, right? It's not often that President Trump actually shows his cards. But in this case, he did, and he throw his support behind H-1B. Having said that, I think as a consequence of Trump 1.0, our dependence on H -1B from an incremental growth perspective is modest. So I'm going to say like in, yes, like maybe 80 people with H-1B that went to the U.S., even should that go to zero, it's not going to create any material impact to our business.

Next question from the line of Rishi Jhunjhunwala from IIFL Capital.

Yes. Just a couple of questions. Keech, the two customers that you have talked about, just wanted to understand given how the environment in BFS today is and the increasing uncertainty around that also, apart from the fact that you will benefit from the vendor consolidation. Otherwise, in terms of spending -- the underlying spending in those customers, can you give some color? And also the consolidation benefit is coming at the expense of what kind of vendors or what kind of work?

Yes. So one of the two is Financial Services. The other is in Professional Services. One of them and I won't mention which one, one of them. As I think said at the beginning of the year that their goal is that they want to moderate spending in the future. And yet they want to be meaningful because tech is so important. The platforms that are critical for the business. So they want to build deeper relationship with lesser number of partners. So the type of work is to build technology and platforms for their business. In that example, the spend will come down and for the customer in aggregate or will be modest growth flattish, modest growth. It won't grow as much as it has in the past, but some vendors will grow quite a bit. The other one, actually, the spend is growing modestly. On top of that, there is a consolidation, which is benefiting us.

Just a second question on margins, right? You talked about looking at doing reported margins similar to adjusted for last year. I'm assuming the commentary around margins are on a constant currency basis.

Think of it as constant currency from -- as of now, right? As of now, yes, which has a headwind actually already on revenue to some extent and some tailwind on margins.

The next question is from the line of Manik Taneja from Axis Capital.

Keech, in the past and even in your initial years of your tenure you've had challenges around consolidation or customer-specific actions. And through the course of recent years, you've been transforming the client portfolio. How do you think about this asp ect on a go -forward basis? Because in the past, we've had instances where this has impacted our overall revenue growth for certain periods. It would be great to get your perspective on the same.

Yes. Good to speak to you, though I think kind of it's a fine balance of growing our customers and yet moderating dependence on the top few. And I think we've been doing that balance, right? So if you look at our top 5, top 10 outcomes, our dependence on t hem has come down, come down even in a 3 -year basis, but on a zoom -out period that you referred to, it has come down very materially, right? And right now, actually, even in a 3-year basis, the composition of top 5 is different from what it was. What it is today is different from what it was 3 years ago. So it's got a different, more robust set of clientele right now. At least 2 of them are different.

Sure. But do you think we are in a better situation now from a client mix standpoint and thereby some of the challenges that we've faced with some of the customer-specific issues, they may not arise on a go-forward basis?

I see much better about where we are, okay? I mean, if a top 3, top 5 client has a growth challenge, it will impact our performance. But the extent of impact will be materially lower than what it was before.

The next question is from the line of Abhishek Kumar from JM Financials.

Congratulations on your first quarter. First question, Keech, is on your initial remarks where we have said that some of the ramp -ups that we are seeing will happen in Q3 and H2. So does it mean that the growth in CY '25 would be slightly back -ended with second half, again, like we saw in CY '24 on a Y-o-Y basis better than first half? That's my first question.

Yes. It will be. But that growth is not contingent upon new things happening. We're not saying, hey, we expect the economy to improve and hence, it -- or we expect demand patterns will change. These are kind of on the basis of what we've done already. In addition, there are more things that can happen that can further improve it, but the base outlook is based on things that have already happened.

Okay. Maybe a quick follow -up. You said you expect your growth to be resilient. Could you define resilience? Does it mean growth similar to CY '24? Does it mean double -digit growth? Any color on what do you mean by resilience?

Yes. Yes. So I first want to kind of say what resilience was in the context of changing macros, right? So I said modestly changing macros, our growth is resilient. It's not going to get impacted by that, okay? So that is the context of the resilience. Double-digit, I think, is like a solid baseline you can assume almost variable for us. It's still early, we're only like 2-odd months in the year. Our ambition is always to do better than what we've done in the past.

Okay. One last question on margin, specifically on ESOP expense. When we say that the only nonrecurring expense left now is the ERP implementation, are we implying that the ESOP expense also will be nil in CY '25 because we just launched ESOP 2024 plan, and it seems like that will have some impact on the ESOP expense?

Yes. We never kind of thought of that as an adjustment and we won't. So it will continue, but it is in our reported numbers now. It will be in our reported numbers going forward. And the reported numbers, like I said, our goal is to get to that 17 -odd percent. 17.3%, 17.4%, what we got to last year on a adjusted basis. So ESOP will continue but I don't want to adjust it.

Okay, understood. 17.3% includes ESOP.

ESOP. Correct.

We'll take the next question from the line of Girish Pai from BOB Capital Markets.

This 200-basis point inorganic element, is this for 4Q 2024? Or is it for the full year? I mean, what would be the number for the full year?

The full year would be like 1 -odd percent, okay? Because the acquisition only made in May, May. So that was for 4Q.

Okay. And on the 4Q basis, I think you had an EBITDA margin expansion of about 330 basis points Y-o-Y. How much of that has been because of pricing? Because you mentioned pricing is one of your key levers, which drove margins up?

The way to think about it's a combination of pricing plus the operational improvement, which has driven more than one third of the overall 320 bps improvement. So the 320 bps is primarily, one third, one third, one third into forex leverage from an SG&A perspective because we are growing in scale. So the investment in SG&A we continue to invest but at a slower pace than the revenue growth and the balance one third which is coming from pricing plus operational improvements put together, a combination of both.

And you mentioned a 4% exit rate. What exactly were you referring to because Q -o-Q growth was, I think, 0.2% sequentially in CC terms. So what is the 4% exit rate you were talking about?

A little 4% is the Q4 annualized divided by full year revenue. Adjusted for furloughs, actually that's about 5%.

Okay. Lastly, you mentioned about consolidation in 2 of your top 3 clients. What do you think -- like what are the factors which drove that consolidation in your favor vis -à-vis the other players who are there in the vendor base of these particular clients? That's my last question.

Both these are existing customers. As opposed to the other 2, which are in works, which are not existing customers. So certainly not long term. We are the new clients. In existing customers where we've worked for a long time, I think the single most import ant factor that works in our favor is our excellence in execution. Our sell-through ratio with these customers is very high.

The next question is from the line of Dipesh Mehta from Emkay Global.

A couple of questions. First of all, Travel and Transportation. Keech, can you provide some sense about the Travel and Transport and how you expect growth to play out? Second question is about the top 20 clients. We have benefited in some of the vendor consolidation exercise, you say two and two are in progress. But any challenges you witnessed, let's say, in overall top 20 clients where we might be on the losing end kind of thing and which can provide challenges in coming quarters? If you can give some sense on top 20, any challenges, if any? And last question is about banking. Whether the recent few weeks phenomena likely to lead to some kind of challenges even in banking growth?

Yes. So top 20, I'll say there nothing that we are aware of that we're seeing currently that could be challenges from consolidation. I think potentially there are known issues of directional GCC efforts in some organizations. Because of which two or three top 20 clients have seen slower growth over the last number of years. And I think that directionally will continue, but we don't see a downside risk in consolidation in any other client. That's on your top 20 specific to consolidation. The second was on banking. I actually think banking, in some ways, the 7.6% full year growth in '24 is not actually reflective of the strength in our business. There are some one-offs that kind of made that number to be what it is. And that will continue f or a quarter, perhaps 2 quarters more. But actually after that, you will see some smart change in direction. So your first question was on travel. I think travel will grow a little bit above company average, and that's the expectation right now for '25. It's not going to be in either end. It's not going to be a major driver or a drag on growth.

This question is for Vikash. You've mentioned that ERP transformation costs should be coming off by second half CY '25. Could you talk about the quantum that we should be expecting on this front given this program has been on through the course of last couple of years?

So from a full year perspective, the impact of this is going to be close to 40 bps.

The next question is from the line of Girish Pai from BOB Capital Markets.

What would have been the Q -o-Q growth for the last 4 quarters just to give -- get an understanding how the cadence has been?

So, Girish, like I said, this is Keech. The typical pattern for us across a number of years is that the sequential growth is high in quarter 2, quarter 3, right, and seasonally kind of slow in quarter 1 and quarter 4. This is generally true over a number o f years. There are years which are off in either direction, can be particularly low or some quarters can be high because we will have excess budget spend at the end of the year but those are off pattern ones.

No, no, I got that. I was just trying to understand what was the specific numbers for the 4 quarters of 2024 if that can be put in the public domain?

Yes. So from a '24 perspective, Q1 was close to 5% sequential. Q2 and Q3 were close to 6% sequential. And Q4 obviously was marginal decline at 50 bps. But one thing what I'd call out from Q1 of '24 perspective where there was a 5% sequential growth, it was coming on the back of Q4 of '23, where the sequential decline was very stable.

And these are all U.S. dollars numbers, right?

They're all U.S. dollar numbers to make the like-to-like comparison, yes.

Yes. Sorry, I think just the FY '23, not just Q4 but Q3 was also a bad quarter, not just for us, for everyone. So it's coming off back of 2 pretty bad quarters.

Okay. A couple of other data points, Vikash, if you can give that. What was the subcontractor cost in 2024? And also, were there any pass -through elements in 2024, if you can give these 2 numbers?

I mean we continue to have some pass -through element as part of our revenue numbers, which is pretty consistent. I mean it's not very material. And there is no material increase what we have from a pass-through revenue number, either in any of these quarters. So that's a sub-$10 million from an overall quarter perspective, if you think about it. In terms of the contractor costs, our contractor mix has remained pretty consistent in terms of the overall mix. The cost is in the range of 17 percentage of revenues, give or take, by quarter, it varies a bit depending upon the number of working days because they are primarily in on-site and contractors get paid only on the basis of the working days because they are almost utilized 100%. So it keeps on varying on a quarterly basis, but at the highest level, it's close to 17 percentage of revenue.

Ladies and gentlemen, we'll take that as the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Well, thank you. Thank you all for being here. I look forward to these ongoing interactions. Obviously, this is a bit compressed. We've been speaking a fair bit. We'll actually be back again for Q1 pretty quickly. So look forward to that conversation.

Thank you, members of the management. On behalf of Hexaware Technologies Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.