Margins will come under control in the next 2-3 quarters: HCL Tech CEO C Vijayakumar

All segments, whether it was our service lines such as IT services or engineering services, and products and platforms, all verticals or geographies, everybody fired on all cylinders. That’s why we had spectacular results. Our bookings were up 64 percent year-on-year at $2.1 billion. There were large deals on the services side and product side. We also added more than 10,000 people in the quarter. Our margins came in at 19 percent, which was flat compared to what it was in the previous quarter. Margins of IT services declined whereas products and platforms significantly went up. The decline in IT services was largely due to investments that we are continuing to make in freshers. We hired 22,000 freshers in FY22, some of them are in training and others in transition, and higher talent costs are also driving some cost increases. But overall, the outlook is good.

Though HCL Tech posted a 14 percent increase in revenue year-on-year, it is still behind Wipro and Infosys, which grew 20-plus percent. Why is HCL Tech lagging and what steps are being taken to catch up with your peers?

I think growth momentum is back. Last quarter, our services business grew 5.2 percent and in the December quarter, services business grew 5.3 percent, which is one of the highest in the industry in terms of organic growth. Year-on-year growth will take some time to catch up but sequential growth over the last two quarters has been very good. Our product business has a different dynamic as well. And we should always look at services and products separately to do the right comparisons. The important aspect is that all of our growth is organic and that is another element to be noted.

Margins have remained at the lower end of the guidance at 19-20 percent, which missed analyst estimates. Do you see this improving in Q4?

So, 19-21 percent was our guided range and we came in at 19 percent. This is something we believe we will be able to control in the next two-three quarters because we are ramping up our fresher talent and we had wage hikes for almost half of the employee base. This was the second hike in the same calendar year. So all of that has contributed to some pressure on margins. But we are pretty confident that this is something we will recover.

One key point is attrition numbers. Though yours haven’t gone past the 20 percent mark like your peers, can you take us through the challenges in the current environment, especially with the war for talent here to stay?

Attrition has gone up compared to the last quarter. If you look at the industry peers, our attrition is still lower than most others. But in terms of our hiring plans, we have a plan to hire 22,000 freshers. We already crossed 15,000 so far in the year and our plan for FY23 is to double the fresher hiring based on the demand and the pipeline that we are seeing. Lateral hiring will be balanced with fresher hiring. While we normally plan freshers, lateral hiring is something which we do based on demand and project and location.

While the product business rebounded, Q4 is seasonally weak for business. In addition, the business has remained more or less volatile. Can you share the outlook for the product and platform business?

This is a long-term strategic investment that we’ve made and we have a very strong product portfolio. A lot of them (clients) are getting modernised and they are being cloud-enabled. And the reason we’ve grown this quarter is a lot of new customers have increased their consumption of some of our products. So these are all good leading indicators of the strength that is building up in this business. However, one has to look at this from a long-term perspective. There are some products which have declining characteristics. So as the proportion of growth products increases, then the overall growth will, too.

Do you retain the 0-1 percent outlook for the product and platform business?

That’s right.

Segment-wise, your Mode-1 (IT services) grew by 5.1 percent, Mode-2 (digital skills) grew 6.1 percent, and Mode-3 (IP-related) grew by 21.6 percent, sequentially. Considering that the product platform business is cyclical by nature, where will growth come from and can Mode-1 and Mode-2 make up?

Bookings and pipeline are good and hiring has been very strong. So we should continue to see good growth in the services business in the fourth quarter.

What kinds of deals are you seeing? Some people are talking about big deals, while analysts say sizes are getting smaller, especially for digital deals, putting midcap firms at an advantage. Where do you see it going?

I think we see both the spectrums. Large deals, which are integrated digital foundation and application modernisation, and there are lots of small deals, which are in cloud transformation and cloud migration, application modernisation, data modernisation. They are really not small deals – it is just that the customers are giving out work in smaller pieces. But if you really add up everything, it does look like big opportunities. And that’s what you see in our client addition. Our $50 million clients have gone up by 11 over the past 12 months. Similarly, all client categories have gone up.

Has pricing increased? We hear from analysts that HCL Tech is stepping up prices, at least for certain projects.

Yes, especially for all modernisation projects, digital engineering, and cloud transformation. We have increased rates and customers are also considering paying higher rates for some skills since everybody knows the current talent and supply situation. So I think they are looking at how they can support us.

In terms of return to home, what is your stand, especially in light of the new variant? Wipro, for example, has said it will shut offices worldwide for the next three weeks. TCS is talking about a hybrid strategy.

Prior to Omicron, we had a return-to-office policy and gradually people started coming into offices. But we have moderated. Now, 3 percent of our employees are working from our offices. And we’re going to wait and watch for another four weeks and then take a call.

Over the past few years, HCL Tech has been expanding in Sri Lanka and Vietnam. Have you started seeing the benefits? If not, when do you expect to see them?

I think last time we announced we had hired 1,000 people in Sri Lanka and these numbers are going up. But given that we are close to 200,000 people, unless it reaches a certain scale, it will not make an impact on the overall numbers. So, it’s early days in many of these geographies. (But the advantage is) if you’re able to go to different geographies, I think it just makes your talent pool much wider. So, from that perspective, I think it is helping us in our net