HCLTECHNSEQ1 FY'23July 18, 2022

HCL Technologies Limited

7,431words
75turns
12analyst exchanges
5executives
Management on call
C. Vijayakumar
CHIEF EXECUTIVE OFFICER & MANAGING DIRECTOR, HCL TECHNOLOGIES LIMITED
Prateek Aggarwal
CHIEF FINANCIAL OFFICER, HCL TECHNOLOGIES LIMITED
Apparao V V
CHIEF HUMAN RESOURCES OFFICER, HCL TECHNOLOGIES LIMITED
Sanjay Mendiratta
HEAD, INVESTOR RELATIONS, HCL TECHNOLOGIES LIMITED
Apparao
Chief Human Resources Officer,
Key numbers — 40 extracted
2.7%
py to share that we've started FY'23 on a strong note. Our revenue growth this quarter came in at 2.7% sequentially, and 15.6% year-on-year in constant currency. Our services business continues to hav
15.6%
started FY'23 on a strong note. Our revenue growth this quarter came in at 2.7% sequentially, and 15.6% year-on-year in constant currency. Our services business continues to have robust growth momentum
19%
in constant currency. Our services business continues to have robust growth momentum, growing at 19% year-on- year, and 2.3% quarter-on-quarter in constant currency. This growth momentum continues
2.3%
Our services business continues to have robust growth momentum, growing at 19% year-on- year, and 2.3% quarter-on-quarter in constant currency. This growth momentum continues to be led by our engineer
5.6%
economic trends. We also saw a strong recovery in our products and platforms business which grew 5.6% quarter- on-quarter and 1.4% year-on-year in constant currency after considering the CFT business
1.4%
w a strong recovery in our products and platforms business which grew 5.6% quarter- on-quarter and 1.4% year-on-year in constant currency after considering the CFT business that we exited last year.
17%
T business that we exited last year. When it comes to margins, we posted an EBIT performance of 17% this quarter. Margins in services was under pressure mainly due to increase in talent cost and tr
3.7%
egmental performance perspective, our engineering and R&D services business led the charge with a 3.7% growth followed by our IT and business services at 2% quarter-on-quarter growth in constant curre
2%
D services business led the charge with a 3.7% growth followed by our IT and business services at 2% quarter-on-quarter growth in constant currency. We are seeing a number of end-to-end engineerin
2.8%
cals instead of the overall business. In terms of geographies, services growth was led by US at 2.8% quarter-on-quarter in constant currency, followed by Europe at 1.6% quarter-on-quarter in constan
1.6%
vices growth was led by US at 2.8% quarter-on-quarter in constant currency, followed by Europe at 1.6% quarter-on-quarter in constant currency. Our growth in the US and Europe was led by our engineeri
10.9%
Among the verticals, technology & services, and telecom & media were top performing sectors with 10.9% and 4.3% quarter-on-quarter growth in constant currency respectively in the services business. Ou
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Guidance — 20 items
C. Vijayakumar
opening
“These are leadership through differentiated services and products, employer of choice across key geographies, preferred digital partner for global 2000 enterprises in our chosen markets, weaving ESG into our business strategy through act, pact, impact philosophy and achieve top quartile TSR over the medium term.”
C. Vijayakumar
opening
“Moving on to our corporate sustainability agenda, continuing our commitment to be net zero by 2040, our GHG emission reduction targets for 2030 were updated by the science-based target initiative to be aligned to a 1.5 deg.”
C. Vijayakumar
opening
“We aim to deliver organic growth in the most capital-efficient way, employing the most sustainable profitability improvement strategies.”
Prateek Aggarwal
opening
“We have continued the guidance at 12% to 14% in constant currency for the top line and the margin guidance continues at 18% to 20% at the same level.”
Sandip Agarwal
qa
“So, what are the components there, why we are getting so badly impacted, and when do you see, what are the levers by which we will be able to recoup this because we did a great start, but this quarter looks really a little weak in terms of both our recruitment number and also our margin number, so if you can elaborate a little bit on that?”
C. Vijayakumar
qa
“In fact, this quarter, we plan to onboard 10,000 freshers, which will be one of the highest number of freshers that we've on boarded in the past five or six quarters.”
Prateek Aggarwal
qa
“And that's the reason we have kept the margin guidance same as what we provided at the beginning of the year.”
Yogesh Agarwal
qa
“I mean, all of us are expecting a slowdown now going forward.”
Yogesh Agarwal
qa
“Isn't it a little late in the cycle for asking price hikes versus maybe clients are looking for discounts now going forward?”
Surendra
qa
“Prateek, you have obviously maintained the guidance for margins at 18% to 20%.”
Risks & concerns — 15 flagged
Margins in services was under pressure mainly due to increase in talent cost and transition cost.
— C. Vijayakumar
There was an additional 50 basis points impact of basically attrition and retention and costs of managing the employee base.
— Prateek Aggarwal
Against the continued pressure on the supply side, we have started seeing some results from our coordinated efforts on both the top line as well as the cost side.
— Prateek Aggarwal
So, what are the components there, why we are getting so badly impacted, and when do you see, what are the levers by which we will be able to recoup this because we did a great start, but this quarter looks really a little weak in terms of both our recruitment number and also our margin number, so if you can elaborate a little bit on that?
— Sandip Agarwal
So, were you expecting this, is it reflective of any kind of slowdown in spending?
— Yogesh Agarwal
I mean, all of us are expecting a slowdown now going forward.
— Yogesh Agarwal
Nothing to really point out as a trend or some slowdown or anything.
— C. Vijayakumar
See Surendra, it’s very difficult to call it out.
— C. Vijayakumar
And productivity benefit related headwind, etc, was kind of well-known from a 1Q perspective.
— Gaurav Rateria
So, Prateek, just wanted to understand, do you believe is there a risk to achieve the lower end?
— Sandeep Shah
Just to change track lastly, given what your portfolio is today, how do you think this would weather a slowdown or a recession if it happens in the key markets?
— Ankur Rudra
And the past trends also indicate that in any kind of slowdown P&P will still continue to deliver.
— C. Vijayakumar
So, it's very neutral to some economic slowdown.
— C. Vijayakumar
Now both of these could come at risk if the demand slows down.
— Kumar Rakesh
Or there could be a potential downside to this margin in case there is a demand slowdown?
— Kumar Rakesh
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Q&A — 12 exchanges
Q
CVK, I have two questions. One, if I recall correctly, we have earlier a fresher intake estimate of 34,000-35,000. Now, we are talking about 30,000. And this is when you know our attrition numbers have actually gone up. So, is there a kind of indirect caution which is there in terms of recruitment, that is number one? Number two, our IT services margins have fallen 180 basis points quarter-on-quarter. There is quite a sharp margin. I understand that our attrition has gone up and it is not showing up so badly because products and platforms has helped us a lot. So, what are the components there,
C. Vijayakumar
I will provide you a commentary on the recruitment and headcount addition and Prateek will get to the next level of details on margins. If you see, our year-on-year growth in headcount is close to 20% and our year-on-year revenue growth is also in a similar range. Over the last few quarters, we've been hiring both lateral talent and fresh talent and we think we have some additional capacity and that was the reason net hiring was lower than what we had in the past. We have not moderated any hiring based on any demand environment. It's really to increase our utilization and better deployment of
Q
Just a couple of questions. If I look at the six, seven of the verticals, at least four of them are either down or flattish, especially larger ones, like manufacturing, financial services, even retail. So, that doesn't look encouraging in a seasonally decent quarter. So, were you expecting this, is it reflective of any kind of slowdown in spending? And secondly, you guys talked about pricing. I mean, all of us are expecting a slowdown now going forward. Isn't it a little late in the cycle for asking price hikes versus maybe clients are looking for discounts now going forward?
C. Vijayakumar
Yogesh, best is to look at the year-on-year growth numbers. All the numbers are very impressive. Tech at 34, telecom at 29, manufacturing at 19, financial Services at 16. There can always be some quarterly variations. Nothing to really point out as a trend or some slowdown or anything. If at all anything to point out, we remain more bullish than what we were when we started the year, based on the pipeline and the very good booking that we had in the first quarter. Our pipeline looks robust and we feel pretty confident of the overall growth momentum that we're seeing. Pricing, yes, I think it's
Q
So, just one question for Prateek. Prateek, you have obviously maintained the guidance for margins at 18% to 20%. But did I understand you right, when you also said that you are hoping to finish the year at the lower end of the band? Because mathematically, both those things don't imply or seem to imply the same thing. So, could you just help us understand that a little better, please?
Prateek Aggarwal
Yes, Surendra. I did say we would be in the margin band of 18% to 20% albeit at the lower end of that band, yes. For the full year or for the end of the year? Full year. Full year, okay. So, one question for CVK. What kind of price increases at a blended portfolio level are we really talking about? Just want to understand how significant they can be for margins. See Surendra, it’s very difficult to call it out. We are looking at the managed services deals where we give a year-on-year productivity benefit, we are obviously having some provisions to negotiate the cost-of-living adjustment, so, o
Q
Sorry to harp on this matter of margin, but last quarter, we gave guidance of 18% to 20% range, and now we expect closer to the lower end. And productivity benefit related headwind, etc, was kind of well-known from a 1Q perspective. So, just trying to understand what really surprised us negatively. Did the attrition numbers and the cost of backfilling attrition came in higher than what we expected?
C. Vijayakumar
See, when we did the planning for the year, there were certain broad assumptions, which included getting the rate increases as well as a part of our overall model. And some of that has taken more time. We expected certain things to happen in the first quarter which did not happen. And the attrition and the overall hiring and backfilling costs also continue to remain high. We were expecting that to moderate a little bit. But as we see in the first quarter, the situation was more or less the same, if not higher, in the first part of this quarter and more or less across the quarter as well. And t
Q
CVK, really sorry to just continue on the margin part, but I'm still a bit unclear on how the margin trajectory will show through for next 3 quarters given that as requirement for you to meet the lower end of your guidance. A - do you expect the pricing impact to compensate for the wage hike, which is going to come up over next 2 quarters in addition to the usual Q1 seasonality reversal? And also, while you just mentioned that Q2 to Q4, you should continue to see margin improvement, you also will have the P&P seasonality impact in Q4, which obviously impacts our overall profitability. How much
C. Vijayakumar
As Prateek said, we expect to be in the lower end of the 18% to 20% band. So, I think it's quite achievable and we feel confident of the trajectory. So, there are enough levers for you to kind of bake in both the impacts, including the Q4 impact and reach the 18%. Yes. I think for Q4, we have a couple of more quarters for all the levers to play out. So, obviously, Q4 will always be a little lower than Q3, but Q2 and Q3 will see an uptick. There could be a little moderation in Q4. And the second question, again, sorry, just a clarification on your earlier comment about utilization improving. I
Q
Just the first question in terms of the margins. So, Prateek, what can go wrong in achieving the lower end of the guidance of 18%. And just a follow up on that. In terms of dependence on your margin levers, which you called out, is it the dependence on a price hike higher versus the other levers which you called out. And third, do you believe most of the margin uptick will happen in 2Q, 3Q as CVK has called out?
Prateek Aggarwal
Sandeep, we are at 17%, right? We have all guns blazing to move that number up. That's the simple answer. Now, how much will come from barrel 1 versus barrel 2, is a planned number. How much will come we’ll tell you next quarter when we come and the quarter after that how much has come. At this time, it is a planning number. We are going all out on all the levers. Let's leave it at that for now. So, Prateek, just wanted to understand, do you believe is there a risk to achieve the lower end? Or do you believe it’s fairly achievable looking at the planning? We believe it is achievable. That's wh
Q
My question initially is on the guidance of margin. You did say you’re looking at the lower end right now. Just curious what will lead you to change your margin guidance if you think you're already looking at the lower end at the end of Q1?
C. Vijayakumar
Of course, Ankur, that is heavily influenced by Q1 performance. So, we have to recognize the realities, that is the Q1 performance. So, that's really the primary factor. Some of the things that we expected did not happen. So, we're just factoring that and then kind of looking at a lower end of the guidance band. Just looking at, CVK, in the last 1-1.5 years, has there been any change in the threshold margins or type of business you've been accepting as new orders? No. As we speak, we have significantly increased our pricing. Of course, with a lot of digital businesses execution, it needed us t
Q
First question is on the Product & Platform business. I think we’re hoping to get some metrics to help track the transition to the subscription. I don't think we found that in the release. So, wondering if you are planning to provide that in Q1 as you said earlier?
C. Vijayakumar
We will start providing this in the future quarters. We could not have the right metrics, so we will provide them in the future quarters. And secondly, how should we think about your fresher hiring? As this is a new thing that you have done and you are traditionally a natural heavy hiring company. So, having taken a large number of freshers last year, have you found that you're taking probably longer than your peers to train and deploy them? Is that why you’ve decided to go a little slow on hiring this quarter? Should we read as that rather than any demand side changes? I think we’ve built up
Q
My question was for both CVK and Prateek. In the recent quarters you have been suggesting that we should probably think about our services growth tracking the headcount increase. Now in the current quarter, the headcount increase has been relatively subdued. So, how should we be thinking about this trajectory going forward?
C. Vijayakumar
I think some additional capacity that we had built up got utilized. And if you look at the year- on-year employee headcount additions, it’s quite in line with the revenue growth. So, I don't think you should read anything into this quarter’s dip in net hiring. I think given the 10,400 number that we've already given for just for freshers for next quarter, that itself tells you the way the wind is blowing.
Q
CVK, my first question was to you. A little longer term over the last year or so, we have been one of the most proactive company in terms of employee management. We were among the first company to move to work from home. We also rolled out one-time bonus. Wage hikes have been consistent and also paid out pretty lenient paid leaves. But when it comes to attrition, over the last one year, despite all of this, our attrition has doubled. I understand this has been a very unique experience for the industry how our attrition has panned out. But what is our learning at the end of this entire exercise
C. Vijayakumar
Rakesh, great question. I think you have to take some comfort in the fact that attrition numbers for HCL are significantly lower than the industry. And all the initiatives that we took has helped us reduce our attrition. Our attention on employees and all the care that we took all through the last maybe 9 or 10 quarters has definitely helped reduce it, but you have to see the systemic trend in the industry. I think that you have to kind of weigh this with respect to that. If you take industry attrition, we are significantly lower than the industry. But it is still not desirable and we do belie
Q
Prateek, you guided for 18% to 20% margin 3 months back, and now adding a caveat that you will be towards the lower end of the band. And possibly we are now entering a period where the relative visibility is lower due to issues like macro, etc. So, why not cut the guidance band and make it more prudent/realistic in line with the changed situation? Why that inertia in the guidance now?
Prateek Aggarwal
I guess that's more about how to handle communication. We are keeping the same guided range. We're just giving you additional color that given the way Q1 has turned out, we are obviously 1% lower than the lower end of the guided range. So, that's the reason for the additional color. We didn't see any real reason for tinkering around with the range itself. I don't know if that answers you or you’re looking for something else. Fair enough. And secondly, CVK, we do agree that year-on-year numbers looks optically good. But we also need to note the point that our recovery from COVID lows happened r
Q
Thank you, everyone, for joining us for our first quarter commentary. As I said earlier, we remain very optimistic about the demand pattern supported by our all-time high pipeline and the bookings that we've seen in this quarter. We have some work to do on the margin front, which we are working very diligently on, and I'm very confident of improving the trajectory from here on. With that, thank you for your time and have a good evening.
Management
Speaking time
C. Vijayakumar
21
Moderator
14
Prateek Aggarwal
12
Surendra
4
Mukul Garg
4
Ravi Menon
4
Sandeep Shah
3
Ankur Rudra
3
Gaurav Rateria
2
Kumar Rakesh
2
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Opening remarks
Sanjay Mendiratta
Thank you, Aman. Good morning and good evening everyone. A very warm welcome to HCL Tech's Q1 Fiscal '23 Earnings Call. Trust you all are safe and in good health. We have with us today Mr. C. Vijayakumar -- CEO and Managing Director, HCL Tech; Mr. Prateek Aggarwal -- Chief Financial Officer; Mr. Apparao – Chief Human Resources Officer, along with the senior leadership team to discuss the performance of the company during the quarter followed by Q&A. In the course of this call, certain statements that will be made are forward-looking which involves a number of risks, uncertainties, assumptions and certain other factors that could cause actual results to differ materially from those in such forward-looking statements. All forward- looking statements made herein are based on information presently available to the management, and this company does not undertake to update any forward-looking statements that may be made in the course of this call. In this regard, please do review the safe ha
C. Vijayakumar
Thank you, Sanjay. Good evening, everyone and thank you for joining us today. It was great meeting many of you in person a few weeks ago at our investor day in Mumbai. As I said there, we at HCL Technologies continue our forward journey with very clearly defined strategic objectives. These are leadership through differentiated services and products, employer of choice across key geographies, preferred digital partner for global 2000 enterprises in our chosen markets, weaving ESG into our business strategy through act, pact, impact philosophy and achieve top quartile TSR over the medium term. I'm happy to share that we've started FY'23 on a strong note. Our revenue growth this quarter came in at 2.7% sequentially, and 15.6% year-on-year in constant currency. Our services business continues to have robust growth momentum, growing at 19% year-on- year, and 2.3% quarter-on-quarter in constant currency. This growth momentum continues to be led by our engineering services business and our di
Prateek Aggarwal
Thank you, CVK. Good evening and good morning, everybody. Just to add on the financial color to the briefing, HCL delivered healthy revenue growth of 2.7% sequentially, 15.6% on a year- on-year basis in constant currency. The highlight obviously is the 19% growth year-on-year in constant currency from the services business. And even the P&P business, though the reported number is minus 6.5% year-on-year, if you exclude the divested or discontinued IP partnership we had with DXC which was discontinued last year, if you adjust for that, it is a growth of 1.4%. Q1 EBIT came in at 17% and net income for the quarter was 14% of revenue. The effective tax rate for the three months is at 24.3%, which is in line with the range I had indicated last quarter. The last year normalized ETR was around 23%, so ETR has increased a little bit by 1.3% points because of some units moving to higher tax slabs with the change of the financial year. The second highlight of the performance this quarter is the
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