HCLTECHNSEQ2 FY'23October 17, 2022

HCL Technologies Limited

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Management on call

C. Vijayakumar

CHIEF EXECUTIVE OFFICER & MANAGING DIRECTOR, HCL TECHNOLOGIES LIMITED

Rahul Singh

CHIEF OPERATING OFFICER, CORPORATE FUNCTIONS, HCL TECHNOLOGIES LIMITED

Ramachandran Sundararajan

CHIEF PEOPLE OFFICER, HCL TECHNOLOGIES LIMITED

Jill Kouri

CHIEF MARKETING OFFICER, HCL TECHNOLOGIES LIMITED

Prateek Aggarwal

CHIEF FINANCIAL OFFICER, HCL TECHNOLOGIES LIMITED

Sanjay Mendiratta

HEAD, RELATIONS, HCL TECHNOLOGIES LIMITED INVESTOR

Key numbers — 40 extracted

rs,

quarter: Rahul Singh, after being President of our Global Financial Services business for many years, has been appointed as the Chief Operating Officer for Corporate Functions. Corporate functions i

2.3 billion

financial services vertical, which also is the largest vertical and has an annualized run rate of 2.3 billion. Srinivasan Seshadri will be taking over the role of Head of Financial Services now. He's been

3.8%

Now, over to our results. It's been a spectacular quarter. I'm happy to share that we delivered 3.8% constant currency growth and 15.8% year-on-year constant currency growth, which is broad-based ac

15.8%

een a spectacular quarter. I'm happy to share that we delivered 3.8% constant currency growth and 15.8% year-on-year constant currency growth, which is broad-based across all segments, all sectors, and

18.9%

ealthy margin performance. Our services business continues to deliver strong numbers growing at 18.9% year-on-year and 5.3% sequentially in constant currency. The growth momentum was led by both en

5.3%

ce. Our services business continues to deliver strong numbers growing at 18.9% year-on-year and 5.3% sequentially in constant currency. The growth momentum was led by both engineering and R&D servic

7.8%

transformation. Our Products and Platforms business now rechristened as HCL Software, declined 7.8% in constant currency sequentially, which was expected of a seasonally weak quarter. Excluding the

2.7%

of a seasonally weak quarter. Excluding the impact of DXC, CFT divestiture, the decline is about 2.7%. As I said earlier, our margin performance has significantly improved during the quarter. We po

18%

rlier, our margin performance has significantly improved during the quarter. We posted an EBIT of 18% which is in line with our desired recovery plan. It's a result of significant operational efficie

2.4 billion

From a bookings and pipeline perspective, we had a very good quarter. Our bookings crossed $2.4 billion, eight large services deals and three significant product wins. Our bookings growth was 23.5% on

23.5%

4 billion, eight large services deals and three significant product wins. Our bookings growth was 23.5% on ACV basis on a YoY basis, and 6% YoY on a TCV basis. Our pipeline remains healthy and well dis

nd three significant product wins. Our bookings growth was 23.5% on ACV basis on a YoY basis, and 6% YoY on a TCV basis. Our pipeline remains healthy and well distributed across large and medium-siz

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Guidance — 20 items

C. Vijayakumar

opening

“Srinivasan Seshadri will be taking over the role of Head of Financial Services now.”

C. Vijayakumar

opening

“We expect this deal to give us an average ACV of US$125 million per year from FY'24.”

C. Vijayakumar

opening

“Basically, we had a 2% guidance range at the end of one quarter, we are narrowing it down to a 1% guidance.”

C. Vijayakumar

opening

“Operating margin, earlier, our guidance was 18% to 20%.”

C. Vijayakumar

opening

“But with the improving success with our margin initiatives, we are now giving a guidance of 18% to 19% for the full year.”

Prateek Aggarwal

opening

“The biggest factor is the realization that we could increase from our customers, both existing customers, existing projects, where we could go back and get more from the same customers for the same project, as well as the benefit of having increased realizations in the deals that we signed in the previous quarters.”

Prateek Aggarwal

opening

“10 for the quarter, same as last quarter and the record date for which is 20th of October, and the payment date will be 2nd November.”

Sandip Agarwal

“And finally, how much more dip we expect in the product and platform?”

Sandip Agarwal

“But other than that, where do you see that these revenues will stabilize from where we can expect that the whole growth of IT services will reflect on the overall growth of the company?”

C. Vijayakumar

“Even if people are moved out of 1 project because of some ramp down, we have very strong opportunities to redeploy them, and there is definitely the number of open requirements, number of internal fulfillment, all of that, it is possibly a little bit moderated, but it is still very strong.”

Risks & concerns — 13 flagged

Corporate functions include people, IT, marketing, risk and compliance and administration.

— C. Vijayakumar

I want to thank him for his great contributions to our success, and compassionately steering us through some of the most difficult times the world has seen.

— C. Vijayakumar

Our Products and Platforms business now rechristened as HCL Software, declined 7.8% in constant currency sequentially, which was expected of a seasonally weak quarter.

— C. Vijayakumar

Excluding the impact of DXC, CFT divestiture, the decline is about 2.7%.

— C. Vijayakumar

P&P is a seasonal business, more volatile.

— Prateek Aggarwal

So, the total impact of realization and utilization was more than half of that 115 basis points.

— Prateek Aggarwal

So, at this point, I'm really not concerned about a little bit of slowdown in growth rates for hyperscalers because the book capacity is what we need to consume by accelerating the cloud migration for our clients.

— C. Vijayakumar

Right now this quarter the comparison is a little difficult because of the CFT exit that was there last year.

— C. Vijayakumar

CVK, on the growth guidance, 16% to 17% services growth implies continued strength in the second half in especially volatile environment?

— Mukul Garg

And did this require any difficult discussions or decisions at your end on your client base?

— Mukul Garg

And to summarize, we've actually baked in some slowdown in services in the second half to get to 16% to 17%.

— C. Vijayakumar

You can call it a difficult discussion, but I would like to look at it as a cooperation between partners in business, where I don't think we are putting a gun to their head or anything dramatic like that.

— Prateek Aggarwal

Actually, it's a very difficult question to answer.

— C. Vijayakumar

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Q&A — 7 exchanges

CVK, I have just 1 question. While you have highlighted that the global macros and uncertainties are there, and you are keeping a close watch on that. But I wanted to just understand, have you really seen any kind of caution or any kind of red flag within your client universe who are material to you where you can sense that there is some sense of cautiousness in them or they would like to take a delayed decision rather than an immediate decision on things which are discretionary in nature, number 1. Number 2, what are you seeing as a new development on the hyperscaler side? Is the implementati

C. Vijayakumar

So, Sandip, thank you for a number of questions. Of course, the macro uncertainty is weighing on a number of clients, and they are definitely prioritizing the areas where they need to spend. So, accordingly, there could be projects where they are ramping down and they are prioritizing some other projects. So, that's a constant trend that we see in such situations. But if I look at our overall demand, it is still a very supply-constrained market, right? Even if people are moved out of 1 project because of some ramp down, we have very strong opportunities to redeploy them, and there is definitel

First of all, CVK, Prateek, a great performance on the operational side, especially on the margins. I have one question for both of you. CVK, on the growth guidance, 16% to 17% services growth implies continued strength in the second half in especially volatile environment? Is it fair to assume that you are getting some gains from shift in spend towards cost efficiency work or has the demand environment remained broadly unchanged versus what you were seeing earlier this year? And Prateek, on the margin side, you spoke about 100 basis points increase in realization. It stands out across what we

C. Vijayakumar

So, let me take the first question, Mukul. See, if you look at the growth in H1 in Services, it's about 19% constant currency growth. And for the full year, if we have given you 16% to 17%, obviously, there is some moderation we have assumed to get to the average of 16% to 17%. And this is driven by a little bit of furloughs in Q3. And even in Q4, we have factored in some furloughs and that's little bit reflected in the numbers. And I keep repeating this, it's about focusing on the right opportunities. The market is very big. There is definitely some churn that's happening across vendor landsc

I saw exceptionally high growth in Manufacturing. So, are there any mega deal ramp-ups or one- off factors that has led to this growth or any large deals that came out of transition?

C. Vijayakumar

I think it's broad-based. I mean, definitely, our Engineering Services has got a good exposure to manufacturing. And a lot of clients across the board had incremental ramp ups. If at all, I have to call out one, I mean one of the deals that we had won in France, which scaled up significantly coming out of transition. We had announced the deal as well in the past, and that contributed a little bit more, but it is more broad-based. Great. And Prateek, are there any reversal of provisions or any such one-offs that have helped control SG&A QoQ apart from the normal seasonal factors like visa costs

Just wanted some inputs on the fresher hiring strategy. While you had record fresher intake in the current quarter, how are you thinking about, from a second half standpoint, in terms of hiring?

C. Vijayakumar

I will request Ram to address this. You'll see that this quarter, our fresher hiring has been higher than all the other previous quarters that we have done. We're on track to reach the plans that we have for this year. So, the trajectory of what we have planned out for this fiscal, we think we will be close to achieving that by following the plans that we have for the next 2 quarters. If you could help us understand, because we were initially looking at close to about between 30,000 to 35,000 freshers for the year, so, does that target still hold true for the year? It does. It will be more clo

My question was primarily on the Europe side of the business. On a global front, we are living with challenges. But despite that, I mean, we have given good growth, specifically in Europe. So, if you could quantify what is driving the growth in Europe? And how should we see this panning out over the next 2, 3 quarters? Or what is your sense when you have interactions with clients in Europe? And my second question was on the IT Services business. I mean, we have seen margins coming back this quarter, largely led by operational efficiencies and operational improvements. Could we see ourselves sc

C. Vijayakumar

We will try and answer this to the best possible extent. I think Europe growth is driven by, as I said, Manufacturing and some of the new geographies that we had invested in the deals that are getting into execution. I think that's 1 big contributor from a Europe perspective. And from a margin perspective, yes, we have executed well, multiple levers, realization, as Prateek talked about, in existing engagements and all the new deals that we have won since January, we had a significant price increase. In spite of the price increase, we've been able to continue to accelerate our bookings. So, I

I know you spoke about the margins, you would not be able to give a lot of detail on it. But could you give an insight on at least the new deal wins and the margin outlook for those because some of the deals could be longer term, and we could extrapolate a trend of revenue and margins, whether they were up or downward or they're flat. If you could just help us out so we could make our estimates.

C. Vijayakumar

Actually, it's a very difficult question to answer. But all that I can tell you is since January, we had increased the prices, and we continue to win deals, which are at a higher margin than what we would have won in the previous fiscal. And when you win large deals, depending on the deal type, and we’ve have generally been engaged in deals where we don't have to take any major upfront kind of investments. That's been the strategy as well. So, there will be a little moderation to start with and then the margins will pick up in large deals. Any more details, please? Unfortunately, no, because I

Sir, I want to know your expectations with respect to the attrition moderation. And also on outsourcing cost side, what trends you are observing on ground check because now industry has slowed the pace of hiring as well. So, your outlook on attrition as well as outsourcing cost rate.

C. Vijayakumar

So, maybe Ram can address the attrition and Prateek can give some comment as well. So, attrition this quarter is 23.8%. If you see, compared to last quarter, it has already stabilized. We think that’s hit the peak. While the previous 4 quarters, you would have seen the trend, we have seen an increasing trend, that has stopped. So, the early indication from that trend is very clear as to where we are. And also if you look at the current quarter number on an annualized basis, which is the indicator of what is the outlook going forward, there's a significant drop that we see. So, we think in term

Speaking time

C. Vijayakumar

Moderator

Prateek Aggarwal

Ravi Menon

R. Sundararajan

Chirag Kacharia

Mukul Garg

Manik Taneja

Mihir Manohar

Abhimanyu Kasliwal

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Opening remarks

Sanjay Mendiratta

Yes, thank you, Aman. Good morning and good evening, everyone. A very warm welcome to HCLTech's Q2 Fiscal '23 Earnings Call. Wishing you all a very happy festive season. We have with us Mr. C. Vijayakumar -- CEO and Managing Director, HCLTech; Mr. Rahul Singh -- Chief Operating Officer, Corporate Function; Mr. Prateek Aggarwal -- Chief Financial Officer; Mr. Ramachandran Sundararajan -- Chief People Officer; Ms. Jill Kouri -- Chief Marketing Officer along with the broader leadership team to discuss the performance of the company during the quarter followed by the Q&A. In the course of this call, certain statements that will be made are forward-looking which involve a number of risks, uncertainties, assumptions and 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 the information presently available to the management and the company does not undertake to update any for

C. Vijayakumar

Thank you, Sanjay. Good evening, everyone and thank you for joining the call today. I'm very excited to be here surrounded by the new vibrant look and feel of a new brand, our new brand positioning, which is, supercharging progress. Before we get into the quarter business performance, I want to take a couple of minutes to update you on the key organizational changes we've had this quarter: Rahul Singh, after being President of our Global Financial Services business for many years, has been appointed as the Chief Operating Officer for Corporate Functions. Corporate functions include people, IT, marketing, risk and compliance and administration. I want to thank Rahul for growing our financial services vertical, which also is the largest vertical and has an annualized run rate of 2.3 billion. Srinivasan Seshadri will be taking over the role of Head of Financial Services now. He's been with HCLTech for more than 20-years, and recently he was the Head of Financial Services for Americas prio

Prateek Aggarwal

Thank you, CVK. Let me start with wishing all of you a happy festive season. Good evening, good morning, whichever part of the world you're joining from. We have an exciting bunch of numbers here. So, I'll go through them. HCLTech Services is what led the revenue growth this quarter, 18.9% year-on-year in constant currency, 5.3% sequentially, and overall HCLTech delivered 3.8% sequentially and 15.8% year-on-year. EBITDA margin came in at 22% and EBIT margin at 18%. And this is despite wage increase that we had planned and executed w.e.f. 1st July 2022 for the largest portion of our population. The EBIT improve with several levers at play, billing rate enhancement, that is better realization from existing projects as well as the new projects that we've been winning over the last few quarters. Pyramid optimization, then better utilization as well as operating leverage, have driven the operational efficiencies and a little bit of help from Forex changes during the quarter as well. The net

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