India’s third-largest IT services provider HCL Technologies‘ reported all-time-high net new deal wins of $3.1 billion for the quarter ended March 31, and is all set for double-digit growth in FY22 as the growth momentum continues.
The company racked up revenue of $10.2 billion in FY21, up 2.4 percent year-on-year. In an interaction with Moneycontrol, C Vijayakumar, CEO, HCL Technologies, talks about what is driving the double-digit growth, investments, and the challenges stemming from the second Covid wave ravaging India. Edited excerpts:
HCL Tech is looking at double-digit growth in FY22. However, you have refrained from giving any specific outlook. Why?
We didn’t want to be very specific on this. Double-digit is the flow we want to accomplish. We will provide more metrics around bookings in the future. We have already declared bookings in the last quarter and full-year booking on net new deals. I thought it is a little more relevant and useful for the management team to focus on bookings. Once bookings happen the revenue will go through. That is the thought process. Instead of giving very precise guidance, the focus is on bookings and execution. So, unfortunately, we cannot share any colour on the nature of double-digit growth.
While your revenue grew 3 percent sequentially in Q4 FY21, your net profit dropped 26 percent and margin declined as well. Can you share the reasons for the decline?
One element is the software product business. This (January to March) is a seasonally weak quarter, and you would have seen a decline in revenue. That directly impacts the bottom line. And then the second element was also wage hikes applicable for some of the senior employees during the quarter.
And usually, at the beginning of the year, there are certain costs that come into a P & L. So, those are the factors that reduced the operating margin. As for the net profit, there was a taxation element and the one-time bonus (to commemorate the milestone of achieving $10 billion in revenue). These are the factors that contributed to lower profits.
Considering that bonuses and covering vaccination costs of employees and their families are likely to impact margins in the next quarter, what are the margin levers you have?
Increasing a little bit of utilisation, onsite and offshore mix and a little more automation. We have a lot of managed-services work where automation plays an important role in optimising the cost and reducing the workload. These are the standard levers we’ve been applying and that continue.
The second wave of the pandemic has seen more people affected than the first wave. How do you see it impacting delivery?
It is still early days and we are taking it day by day. The only comforting factor is that we have an onshore presence as well. So, wherever we are impacted, we are shifting some additional work onshore. But it is too early to comment.
You have stated that you have an aspirational goal to have Mode 2 services (new-generation services) revenue match traditional services in the medium term. Please elaborate on this.
In our services, we are trying to increase the composition of Mode 2. We have focused Mode 2 teams in every service line, whether it is cloud or the internet of things, security, digital analytics, or application modernisation.
In three years we should see our services business somewhat equal in Mode 1 (traditional) and Mode 2. The product business is a separate area.
Does this mean that you expect the traditional IT services business to come down and expect Mode 2 to compensate for it?
That is correct. In traditional services, the focus is on how you can reduce the cost and where you can really make your operations more automated, very lean and reduce costs. So, the savings can be reinvested in a lot of new areas, which could be helping the business transform or enhance customer experience, optimise your supply chains and your inventory management. Technologies like IoT can help in streamlining a lot of asset-related industries. Those are the areas where we are seeing good traction.
You have planned investments in newer geographies and enhancing capabilities. Can you share where the investments will happen and the quantum?
We have stepped up investments (this year) and this will also generate more business. We will spend approximately about 1 percent of our revenue in all the new areas, which includes a significant increase in our sales teams and the products and platforms segment. It includes a presence in a lot of geographies (like Australia, Canada, Japan, France, Germany and Japan) or an additional and enhancing presence in those geographies and (building) some specific Mode 2 capabilities. We will also invest to build entry-level hiring in different geographies or where we are increasing our entry-level hiring requirements.
Is this range of investments specific to FY22 or will it continue?
These are incremental things and it should not be happening every year. In one or two years, it should stabilise.
Consulting seems to be one of the biggest themes this year. What is HCL Tech’s thought process on this?
I think it’s very situational. In some verticals, we may invest in building consulting capabilities, and in some we may not. So, it is very specific to different industries and service lines.
I think we are already doing extremely well in the digital consulting space. But our consulting is more around operating model transformation, change management. For example, how do we convert an existing operating model to a more vertical or product aligned operating model?
So, we are very strong in that space. That is helping us in our new wins and client conversations. And that’s what is driving Mode 2 growth. So, we do not really think we will invest a lot in business consulting. That’s not our area of focus.
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