Margins likely to improve in Q3: Hexaware CEO

Carlyle-backed IT services firm Hexaware Technologies , which was relisted on the stock exchanges earlier this year, posted revenue of $382mn in Q2CY25 (Hexaware follows a Jan-Dec financial reporting cycle). With constant currency sequential growth of 1.3%, the company saw a sharp rise in its other expenses during the quarter.

In a conversation with Fortune India, CEO of the company R. Srikrishna Ramakarthikeyan spoke about the company’s financial performance, recent acquisition of SMC Squared, and the outlook for the second half of the year.

Fortune India: What is your reading of the macro environment, especially the US, and has anything changed since March of this year?

R. Srikrishna: The last three months have not been good. What it was at the end of quarter one versus what it is now is worse for sure. Could that change pretty quickly going forward? – Yes, it could. What could change it is, I think, a number of trade deals getting announced could change it, and other things too. But that could be the single most important thing.

Fortune India: You concluded the acquisition of SMC recently. If the revenues start trickling in from the current quarter, why haven’t we seen an increase in the margin guidance? Can you provide commentary around this?

R. Srikrishna: So, the margins that we said for the full year that we will deliver were 17.1%–17.4%. In the first quarter, we delivered about 16.7%, which means in the later quarters we will deliver more if we average it out. We are on a pathway to doing that. This quarter we did 17.2%, and I think there’ll be some improvement in Q3. Bear in mind Q3 is also our wage increase quarter. This year we have said there is likely to be some increase in EBITDA. Q4 has cyclical headwinds, but outside that, underlying margins will do quite well – not just due to SMC but a host of others like operational factors. But the biggest headwind will be the wage increase.

Fortune India: Could you elaborate on the opportunities in the GCC space that you are looking to tap into with the SMC acquisition and the approach that you have taken in this business, given that a lot of larger peer companies have also set up units to tap into this space?

R. Srikrishna: SMC specialises in helping customers set up and run GCCs. They do this in two or three different variants or models. But the core of what they do across those models is help customers set up and run GCCs and, after a period – usually three years – then transfer it to the customer. It’s (GCC business) an arms race right now. We think we’ve taken a different approach. There are two differences. First, a lot of announcements you’ve seen from the larger peers have an India-based leadership for this role with the GCCs that are in India. The approach we have taken is US-based leadership. Why? Because that’s where the sale happens, the origination, when a client says, “I want to go to India,” which is what we are tapping into at that time. Second, I think a lot of people assume that GCCs in a set-up phase means outsourcing with an option to transfer at the end of three years. What we’ve learned is that this is not the case. There are a lot of differences in setting up a GCC than simply doing a BOT (Build-Operate-Transfer) contract. And that’s the reason today, when a customer wants to set up a GCC, their port of call is not an outsourcing company but specialist firms.

Fortune India: This quarter, your other expenses have significantly shot up, including a provision of ₹78.2 crore which is client-related. Could you provide more clarity on these items?

R. Srikrishna: This is very client-specific. It’s frankly a client that has acted in bad faith. This is about receivables for services delivered over a number of quarters, and there is a legal battle on right now. We made the provision out of an abundance of conservatism, but this process is ongoing as we try to get the money back.

Fortune India: In the previous quarter you had mentioned that ERP transformation costs would come to an end by June. However, this quarter you are indicating that they would continue. Could you provide more clarity around this?

R. Srikrishna: The good news is that even though some costs associated with ERP will continue in H2, we have not changed the margin guidance. In terms of actually doing, we are being a little more cautious about how we roll this out. We have incrementally, through the year, gone live with modules every quarter – including on 1st July we went live with some modules. It is highly likely that by the end of the year we will go live with all the modules. So, we are just staggering the go-live over multiple periods, instead of doing it all together.