HCL Technologies hosted a conference call on April 26, 2024. In the conference call the company was represented by Mr C Vijayakumar-CEO & MD and Mr Prateek Aggarwal-CFO.

Key takeaways of the call

When the company commenced the year there was cautious optimism around growth in line with market situation on the backdrop of reduced discretionary spending and slowdown in some industrial verticals. The company has responded to the uncertain environment with much needed agility and capability and the company has shown good growth with good control over profitability.

Q4FY2024:

For Q4FY2024 total revenue stood at US$ 3430 million a growth of 6% CC YoY. Services CC Revenue was up 3.0% QoQ and  up 6.7% YoY led by growth in Telecommunications, Media, Publishing & Entertainment (up 21.6% QoQ & up 39.2% YoY).

IT & Business services revenue stood at US $ 2.55 billion up 4% QoQ and 6.7% YoY in CC terms.

Engineering and R& D (ER&D) was up 6.4% YoY in CC terms. Software revenue was flat YoY in CC terms.

EBIT margin for the quarter was 17.6% down 48 bps YoY. Services margin decline by around 73 bps QoQ and 29 bps YoY.

Margin Movement: The EBIT margin declined by 218 bps QoQ at company level. This was caused by seasonality in software business which had an impact of 156 bps and the balance drop was from  73 bps decline in services margin. This was impacted to the tune 20 bps due to increments, 35 bps due to marketing and travel related expenses and the balance was exchange related.

FY2024

FY2024 revenue stood at US $ 13270 million up 5% YoY in CC terms and 5.4% in US $ terms. The strong momentum is attributable to both services business and software business. The growth came on back of segments, different industries and geographies.

Services business grew 5.4% YoY in CC terms.

Segment wise IT & Business services grew 6.2% YoY in cc terms; Engineering and R& D services declined 1.6% YoY in CC terms. Digital foundation, Digital process outsourcing and the overall portfolio of digital services contributed to the YoY growth.

Despite slowdown in discretionary spend digital growth was 5.3% YoY in CC terms and contributes to 37.3% of the company’s total revenue. Among digital the cloud transformation and cyber security were the outliers which had good growth along with company’s SAAS portfolio.

Software grew 2.3% YoY in CC terms. This business has made strategic progress with focus on subscription and support revenue and steadily growing annual recurring revenue (ARR). Subscription and support revenue has grown from 78.8% in FY2023 to 83.8% in FY2024. ARR revenue declined  on a YoY basis and QoQ basis drop is on account of the decisions which the company made to discontinue some telecom product portfolio.

Geography growth was led by America which grew 6.8% YoY in CC terms followed by Europe which grew by 5.5% YoY in CC terms. While RoW declined by 7.1% YoY in CC terms.

The company’s top performing vertical was financial services which grew 12.1% YoY in CC terms amid macro concerns and manufacturing grew 9.1% YoY supported by ASAP acquisition and Retail CPG grew 8.2% YoY in cc terms.

EBIT margins for FY2024 stood at 18.2% up 11 bps.

FCF grew 27.7% YoY in FY2024.

Client matrix: The company added 3 accounts in the 100 million + category and 25 accounts in the 10 million + category on a YoY in FY2024. The company also added 20 clients in the 5 million + category, 12 clients in the in the 1 million+ category.

Bookings:

Bookings for the quarter stood at US$ 2290 million. The company signed 21 large deals in the quarter with 13 in services and 8 in software segment. The company also had healthy deal signings in Gen AI space.All of the deal wins are net new deals and renewals are not included in deal win numbers.

Bookings for whole of the year stood at US $ 9759 million up 10% YoY. The company won 73 new large deals of which 36 were in services and 37 in Software.

Pipeline continues to remain very strong and remain healthy. Pipeline is strong and is across large and medium size deals.

Human Resource:

Current employee count is 227481.

Net additions were 2725 and the company added 3096 fresher’s in Q4FY2024.

Net additions in FY2024 were 1537 and fresher’s additions was 12141.

Attrition continues to come down and LTM attrition stood at 12.4%.

The company expects hiring in line with growth rate.

Fresher’s hiring numbers in FY25 will be similar to FY24.

Organization structure: The company has integrated the engineering and R&D services sales with IT and business services sales. Now the company has an integrated go to market structure. This will enable the much broader reach of the company’s ER&D services across all the geographies and verticals and will accelerate the growth of the company’s engineering business and IT and Business services segment.

Guidance:FY2025 is expected to be a year of consolidation both on the demand and supply side. Clients are consolidating their technology spends over the last many quarters.

Total revenue at company level growth is expected to be in the range of 3-5% YoY in CC terms and services CC revenue growth is expected to be in the range of 3-5% YoY.

Guidance is based on: In Q1, the company usually has annual productivity pass back for its clients and the same impact will be there  in FY2025 as well. But over and above the annual pass back there is an offshore impact in one of the clients started last march which will impact the landing of Q1 revenue in -2% QoQ V/S -1.3% in Q1FY2024. Post Q1FY2025, revenue growth guidance is based on CQGR of 1%-2.5%.

Q1 revenue will not have a major impact of Stake divestment in JV with State Street which the company has already announced as the company will be recognising some revenues as per contractual clauses in Q1. The full impact of the disinvest will be from July 1, 2024.

EBIT margin is expected to be in the range of 18-19%. The company is focussed on improving the margins.

Outlook:

Amid cautious optimism enterprises are focussing on specific strategic priorities such as AI, engineering and finops. While discretionary spending is yet to rebound, overall enterprise IT spending is expected to remain moderate or healthy. Discretionary project based spending remained under pressure and AI related spending is coming at the cost of other IT budgets effectively bringing more with fewer budgets

Engineering and R& D spend and outsourcing of the same is expected to continue globally.

The company is witnessing lot of opportunities in AI and Gen AI space.

Tech vertical of the company is a concentrated portfolio. Top 10 accounts account for around 60% of the total revenues. Large tech platform companies are working on cost reduction and efficiency improvement. Pipe line is looking better and most of the tech companies are investing in R&D and the company expects to grow in this vertical.

The overall macroeconomic environment may impact the company’s growth potential in FY25. The macro situation will be similar to what the company saw in FY24

Dividend: The board has declared interim dividend of Rs 18 per equity share.

Management commentary:

Commenting on the performance Roshni Nadar Malhotra-Chairperson  said “ Led by a differentiated portfolio, HCLTech continues to grow despite global economic and geopolitical headwinds. Our focus on doing business sustainably and responsibly is sharper than ever as we scale our community initiatives beyond India."

C VijayaKumar-CEO & MD said “HCLTech continues to lead the industry in FY24 with good USD revenue growth of 5.4% YoY during challenging times through our strong commitment to our clients and our people.  More importantly, we have translated this growth into even higher value creation for our shareholders with our OCF coming at US$ 2,711 Mn, up 21.6% YoY and FCF at US$ 2,584 Mn, up 27.7% YoY. As we look ahead, global enterprise technology spend will only grow with adoption of AI. We are well positioned to capitalize with our AI led propositions, Global delivery model and ideal mix of technology services and products.”

PrateekAgarwal-CFO said “HCLTech’s FY24 performance underlines the resilience of our business model with Revenue at INR 109,913 Cr, growing 8.3%. We delivered this industry leading growth with EBIT at 20,027 Cr, up 8.4%. Net Income (NI) for the year came in at ₹ 15,702 crores, up 5.7%, translating to an EPS of ₹ 57.86. Our Board is pleased to declare ₹ 18/share as the Dividend for the quarter, bringing the total to ₹ 52/share for FY24, which is 90% of the EPS. Our razor-sharp focus on cash generation resulted in OCF/NI coming at 143% and FCF/NI at 136%. We continue to expand ROIC, with the Company’s ROIC up 341 bps YoY at 33.8% and Services’ ROIC up 430 bps YoY at 41.6%.”