HCLTech CEO hopes for a brighter H2, despite tepid discretionary spending

HCLTech CEO and MD C Vijayakumar

HCLTech expects strong growth in the third and fourth quarters of this fiscal, but the market continues to remain tepid on discretionary spending which was expected to revive at the start of year, chief executive C Vijayakumar said at the company’s earnings conference for the quarter ended September 30.

The IT services major reported strong deal wins at a total contract value (TCV) of $3.96 billion, driven by the $2.1-billion Verizon deal in Q2. This is a significant jump from $1.56 billion last quarter, which came after seven consecutive quarters of maintaining $2-billion-plus in deal wins. TCV has grown 150 percent on-quarter, and 67 percent on-year.

HCLTech won some very large deals in Q2 and completed the acquisition of German automotive engineering services provider ASAP Group, which is likely to start reflecting in the revenue growth from this quarter.

The company has won 16 large deals this quarter, including 10 in services and six in software.

“In the next two quarters, we expect very healthy sequential growth in services business. This growth in normal times would have been considered extremely good because this includes a seasonally weak Q3 in the services businesses. Overall, in the entire year, when we combine a weak Q1 and a good Q2 that we are reporting today, our organic growth will add up to 4.5-5.5 percent in services for FY24,” Vijayakumar said.

“We have gained share in both cost optimisation deals and transformation. However, the market is still a little tepid on discretionary spending. At the start of the year, we had expected that tech spends will start coming back partially at least. But, with the continued macro scenario, spending has not come back the way we expected. From this perspective, our revenue guidance for the full year include ASAP Group acquisition, we’ll end up with 5-6 percent growth at a company level,” he said.

According to Vijayakumar, Retail and CPG grew 7.5 percent QoQ in constant currency, and telecom and media grew 6.2 percent QoQ in CC terms which was weak until last quarter. Financial services and life sciences too have continued to show good growth on a yearly and quarterly basis.

While the company has won several large deals this quarter and has beaten analyst estimates on quite a few metrics including QoQ net profit growth and operating margin growth with the exception of quarterly revenue being a slight miss, it has still cut down its full year revenue growth guidance.

Full year organic revenue growth guidance in constant currency terms for FY24 stands at 5-6 percent, down from the previous estimate of 6-8 percent. The company has, however, retained its full year operating margin guidance of 18-19 percent.

In Q2, the company reported a 9.92 percent year-on-year (YoY) growth in net profit. Sequentially, net profit was up 8.55 percent driven by a robust deal pipeline reported this quarter.

Net profit for Q2FY24 stood at Rs 3,833 crore. Consolidated revenue for the quarter grew 8 percent YoY to Rs 26,672 crore as compared to Rs 24,686 Crore in Q2FY23.

EBIT margin for the company improved by over 150 bps QoQ to 18.5 percent. The company's attrition rate also dropped to 14.2 percent from 16.3 percent in Q1. HCLTech plans to add 10,000 freshers in FY24 even as net headcount addition continues to slow down.