India’s third largest IT services firm HCLTech is banking majorly on improving utilisation among other aspects to maintain its FY24 full-year EBIT margin guidance of 18-19 percent following a weak June quarter. The company also reported a decline in headcount in the first quarter of fiscal 2024 ended on June 30. The headcount was down by 2,506 employees, bringing the total employee base to 2,23,438.
HCLTech missed on most performance estimates including revenue growth, net profit and EBIT margins. During its earnings conference, HCLTech’s CEO and MD C Vijayakumar also said that the fall in headcount was due to a conscious decision by the management to not backfill all attrition. Pay hikes for employees too are getting deferred by a quarter. This was an impact of the uncertain demand environment, the company said.
HCLTech’s order book too fell by nearly 24 percent YoY in Q1 to $1.56 billion, down from $2.05 billion in the same quarter last fiscal. EBIT margins or operating margins for the quarter came below expectations at 16.9 percent. Vijayakumar, however, remained unfazed by the performance as he expects business to pick up from here on.
In an interview with Moneycontrol, he discussed demand outlook, deal pipeline, updates on generative AI, hiring targets and more, that will propel the company’s growth in FY24.
Also read: HCL Tech Q1 FY24 – All-round disappointment
Edited Excerpts:
On the face of it, it was a disappointing set of earnings, way below what people were expecting. What does this mean for the rest of the year for HCLTech?
If you look at three of our largest verticals -- financial services, manufacturing, and life sciences and healthcare, all three of them have grown in mid-teens on a year-on-year basis in constant currency. That's a very strong growth of those three verticals. We had challenges in tech and telecom, and a lot of our engineering services are exposed to tech and telecom verticals. And we saw a reduction in discretionary spend and some ramp-downs, which caused an overall decline in revenue for us. It was a little more than what we expected. From here on we expect to see good sequential growth. That's clearly what our forecast is.
Let me come to the tech and telecom, there's been a significant contraction. Is this because of some contract renegotiation, or are projects getting cancelled?
That isn't one specific reason but a few larger clients were prioritizing some projects, and as a part of that we had to ramp down.
You are sticking to your growth and margin trajectory and guidance, despite a soft start, so what is giving you the confidence? How are you going to recoup some of it?
So we have a very strong pipeline. Last quarter also the pipeline increased, and even this quarter the pipeline has increased. It's at an all-time high. And we expect to see a good booking in this quarter, which I think will help us continue to have better growth sequentially from here on. This will lead us to meet the 6-8 percent revenue growth guidance this year.
In terms of hiring, do you expect it to improve going forward because that's also a lead indicator of growth?
That's right. We do have some unutilized capacity, utilization can improve that will help the growth as well. But beyond a point, we will have to start hiring. Overall in FY24, people exit numbers will be higher than the FY23 exit numbers.
You had mentioned on the call about clients asking for productivity gains. So how worrying is that? Is there more pressure now to offer discounts and negotiate on pricing?
This is a part of a lot of our business contracts, which we sign for a five-year duration every year, there is certain productivity that is baked into the contract itself. Usually in April, for a number of contracts the productivity benefits kicks in. That's why April, May June is a seasonally soft quarter for HCL tech.
You pipeline is going to be strong in the upcoming quarters. So since most of these segments have underperformed, which areas do you see the demand coming from? And what kind of deal sizes do we expect? What's the deal mix going to look like?
Around 60 percent of our verticals, the three biggest verticals for us have done very well. Double-digit growth, or mid-teens growth is what we've seen. It is really tech and telecom where we were weakened. Right now the pipeline is fairly broad-based across industry segments, across our service lines and geographies.
What is your fresher hiring target for FY24?
We continue to hire, I don't have an exact number for the rest of the year. But we will continue to hire freshers. There is no change in strategy there.
You announced a fairly significant acquisition of ASAP Group for $279 million. When does this become revenue active? And why a big M&A now?
We have been talking about this strategy for some time. In our engineering services, we wanted to expand into automotive engineering. That's an area of strategic focus for us because we believe that of the global E&RD spend a significant percentage comes from automotive firms. So we wanted to participate in that, especially in the newer areas around autonomous connected mobility and electric kind of solutions. And this acquisition helps us gain that capability. A lot of our client access some of these areas, we will build the software capabilities that we bring on top of this to really make a very strong winning proposition. And we expect this to be very good in terms of long-term growth potential for us.
You maintained that the margin guidance of 18-19 is going to return for FY24? Beyond a strong pipeline, what all other levers do you have in place to achieve the margins at the moment? How are subcontracting costs and other aspects working out?
Yes, we have definitely reduced our subcontracting and third-party contractors in our overall cost elements. But we think there are some more opportunities to reduce our costs. A lot of it is also dependent on growth, growth also will also improve margins. The biggest lever that we have is improving utilization.
You said you already have 140 PoCs and deals in conversation for generative AI and these things are going to be external as well as internal. So can you shed some light on what’s in works? And secondly, in terms of having the right talent, or training talent rather for AI, how is HCLTech approaching that?
We have announced partnerships on generative AI with Microsoft Open AI and Google.
We have committed to training 20,000 people for Gen AI capabilities in the next 18 months. While we have a lot of talent who are already working on AI and ML programs, where there's an intervention to train them on Gen AI. That's number one. Secondly, we have Gen AI labs where we have the opportunity for clients to come and experiment with some ideas on how they can leverage Gen AI, where we also have experts who can work with our clients to make the concept or idea really a prototype that they can experiment in their own organizations.
There are a number of companies who are looking at Gen AI strategy, which is an enterprise-wide strategy where you need to look at the data strategy, security and privacy policies and also look at how much of cloud adoption is required to enhance to leverage that you can get out of Gen AI. So we're working with customers to build a strategy around this and to help their businesses leverage Gen AI.
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