FY25 discretionary spending environment will be similar to FY24: HCLTech CEO

HCLTech CEO and MD C Vijayakumar

HCLTech, one of the top five Indian IT services companies, reported industry-leading growth in FY24, with revenue growing 8.3 percent year on year (YoY). Though the company slashed its full-year revenue guidance for FY25 to 3-5 percent, it was higher than Infosys’ guidance of 1-3 percent.

However, the net profit for Q4 missed Moneycontrol’s estimates, while the margin, at 17.6 percent, declined by around 220 basis points on a sequential (quarter on quarter) basis.

HCLTech added employees both on a quarterly and full-year basis, contrary to the larger industry trend of a headcount decline.

In an interview with Moneycontrol, CEO and MD Vijayakumar discussed the company’s outlook on discretionary spending recovery, the demand environment in FY25, the hiring strategy, telecom vertical growth and more. Edited excerpts:

Your revenue and net profit numbers for Q4 are largely in line or slightly below estimates, but the margin was a miss. You also said that FY25 will have a similar macro environment as FY24. By when do you see this changing? When will you see growth coming?

Our assumptions are that FY25 will have a similar discretionary spending environment as FY24. Now, when will it change is something all of you are in a better position to make a call based on all the information that's available. But in our business plan, we've assumed the environment would be similar.

We are living in a very volatile environment; things can change very quickly. But I think to be on the safer side, we made the same assumptions like last year.

Which areas do you see driving discretionary spending once a recovery begins?

If you see the last three years, discretionary spend-related revenue for us has only increased, like our digital and analytics business, our engineering business, cloud, cybersecurity... So when the spend comes back, we will have a very strong growth outlook, because we are in all the key areas where customers are expected to spend.

Also Read | HCLTech to add over 10,000 freshers in FY25

I think the biggest spend area is going to be around data in the coming quarters when the spend pattern picks up. And a lot of that is also a result of customers doing a lot of proof of concept (PoC) or small projects on generative AI. They realised that they needed to do a lot more work on the underlying estate that they have; on data, cloud—whether it is to be done on a hyperscaler or to be done on a private AI stack, which language models to use, all of that is going to lend itself to significant spend when the environment becomes a little more conducive.

What's the outlook on large deal wins in FY25? And what's the deal mix going to look like?

I think we feel quite confident about our momentum. In the last quarter, we booked $2.3 billion of net new deals. This excludes renewals, rate cards and framework contracts. So, it's from executable contracts of about $2.2 9 billion in Q4. And we have a strong pipeline and our expectation is bookings will increase year on year. We have some large deals in the pipeline. Some of them materialising will also be something that one should be expecting.

Also Read | HCLTech to see a 2% drop in revenue in Q1FY25; CFO gives guidance

Telecom growth stood out for HCLTech in FY24, highest historically, contrary to industry trend. What’s driving that and do you expect this to continue in FY25 as well?

I expect the momentum to continue in FY25. In addition to the large deal that we announced, we are playing in the entire value stream of telecom service providers. And we have some very good templates of how to modernize the different value chains in the telecom service provider segment. And this is a strong proposition, which we plan to take to multiple customers. And I think here we have a unique proposition as to how we can deliver these programmes. We expect the telecom service provider segment to continue to be a good growth driver for us.

From a larger industry perspective, do you see telecom demand coming back in FY25?

Spends coming back is one thing, but we also have to ask a question: how relevant are you to your clients? Today, we are positioned as a challenger. Customers see a lot of relevance in how we're approaching some of the modernisation expectations that clients have. That differentiation that we bring with the combined offering of IT and engineering services, I think that is making a lot of difference. And that's why in some industries, we are definitely bucking the trend from what you're seeing in the market.

The technology and services vertical had negative growth YoY and QoQ. When do you see a recovery starting to happen? How much of the new growth will be linked to generative AI and AI transformation?

Also Read | Top 5 Indian IT services companies saw a decline of 69,167 employees in FY24

In the tech vertical, we have large clients. They had cut back on spending in the last year. But we already see them planning out new investment areas. And we will be a beneficiary of some of the potential spend that is expected. The pipeline in the tech and services vertical is quite strong. So, we expect to deliver good growth in this vertical this year.

Data is going to be the biggest area of spend. And that is also largely fuelled by all the thinking and the initiatives that clients are taking in generative AI.

You have bucked the industry trend in terms of hiring both sequentially and full year. Also, your attrition has been trending down. Given that there’s still a slowdown in demand, take us through your larger hiring strategy for FY25.

You shouldn't be surprised about our net people addition, because we've had good growth compared to the industry; we have grown significantly more. It shouldn't be a surprise that our headcount is growing, because our business is growing  5.4 percent in services and 5 percent overall (in constant currency) and that will need the talent to continue to execute. And it will be somewhat similar in the next year. Ram (CHRO Ramachandran Sundararajan) called out the fresher hiring numbers in the press conference. So, we will continue to hire in some specific areas like data, SAP, cyber... experienced hiring will also happen. So all of this will eventually lead to growth for us.

What’s the update on returning to the office? TCS has linked the variable payout to return to office. Is HCLTech considering something similar?

Firstly, the leadership, the mid-management and the front-end team leaders have to come three days a week is what we have mandated. We already see a very high level of compliance on that. And now, the rest of the organisation, we operate with some flexibility. Each leader, each execution team has certain priorities. And largely our model is at least three days a week, we would expect everybody to be at work.

Our approach is to really make the time they visit office and collaborate with colleagues as meaningful as possible. That becomes a positive reinforcement for people to come in, rather than a rule-based reinforcement. That's the approach we will take.

How are client conversations shaping up as we enter the election year? Have concerns at a macro level shifted as compared to FY24?

I think they are continuing to prioritise the right areas to invest in. I would not say that the environment has changed in any meaningful way, since the last quarter, when we spoke to all the analysts and investors. I think the environment remains the same.

Customers’ investment strategies are more agile, and they continue to evolve based on prioritisation and budgets. They're not fixed annually and they evolve a little more iteratively in an agile manner as the year pans out.