HCL Technologies Limited analyst Q&A

Thank you. We will now begin the question-and-answer session. The first question comes from the line of Ravi Menon with Macquarie. Please go ahead.

Thanks for the opportunity, and congrats on good guidance for next year. I want to ask about your performance in North America this quarter. We have seen a decline of 128 million quarter -on-quarter, but when we look at the verticals, it doesn't really seem to be showing up as a sharp decline in the near time for BFSI. Telecom, I think if I have not mistaken, organically it has shown growth, we have seen some weakness in Life Sciences and in Manufacturing and Retail. But overall, can you talk a bit about what you are seeing in North America and there is also some material weakness compared to your expectations going in to the quarter?

Yes, Ravi, thank you for your question. If you remember last quarter, we had called out that there was one large program which got completed in the Retail CPG segment. And we did call out that that will have an impact in Q4. And that impact is probably playing out in the US business. And even I called out the specific number during the last quarter. That's the only reason. Across the board we saw the quarter proceed as we had envisaged. There weren’t any major surprises during this three months.

Thank you, CVK. And so the caution that you are making into your guidance, or assuming probably slight deterioration, that's something that you have not really seen yet, but you are thinking that it might happen, looking at one of the deal deferrals that you referred to in the press conference. Is that right?

Yes, I think that deal deferral was not directly related to the tariff. It was based on general environment. The client decided not to go forward on that. And we did not see any cancellation or any specific rundown during the last three months. And our guidan ce, the lower end, we believe the environment will deteriorate from where we are. And that's what the 2% represents. And obviously the midpoint also we assume that the environment will deteriorate, but it assumes that a couple of large deals, which were in the pipeline, we are likely to close in Q1. That’s the assumption for the midpoint. And at the higher end, we believe the environment could remain the same and we will do well in Q1 based on the pipeline and the deals which are expected to be closed.

Thank you for the detailed explanation. One last question on the ER&D si de. I mean, last year we had seen decline in ER&D. So, how is the environment looking for that segment?

Yes, it's good. And we are very happy to report that our year-on-year booking in ER&D has grown 75%. Our joint go-to market across most verticals are delivering very good results. A lot of client relationships where we could significantly create a mindshare on our engineering capability. And we think it's going to be a good growth year for our ER&D Services purely based on what we have done and what we have seen. Obviously, the macro might have some impact, but as we see it now, we feel good about how ER&D will play out in FY26.

Thank you. Next question comes from the line of Sudheer Guntupalli with Kotak Mahindra AMC. Please go ahead.

Yes, hi, CVK. Congrats on the good numbers and a couple of questions. So , if you look at the general consensus of the economists, we are almost in a recessionary environment with median odds of US recession pegged at around 50-60%. However, that kind of gloom is not reflecting in your guidance or the outlook shared by a couple of your competitors. So, what is driving this disconnect? Is this because of the fact that industry is now coming off to back- to-back low growth years, and we might be at a stage where the business cycle and easy comps, sort of put a floor on the extent of growth deterioration this time around?

Yes, I mean, obviously, so far we haven't seen any impact, but I mean, I think we are all reasonably certain that the environment will deteriorate. And yes, as you are referring to the recession is the most likely outcome. And that's what is baked in a lower end of our guidance, which does not assume any meaningful growth from our exit. I think our forecast is also driven by the Q4 bookings and we have had a good booking and it will definitely convert into revenue and we have analyzed each of the deals. We believe it's very important for clients to continue and some of them may not re ally have an impact due to tariff. So we feel confident of the ramp up of the Q4 bookings. And it is one of the strongest bookings that we have had in the recent past. So, I think that's where we are. I guess it's very dependent on where you are in the business and what has been the performance on booking in the recent quarters and how your pipeline looks and things like that. I mean, 2% to 5% is still a very modest kind of guidance because we were used to much higher numbers in the past. So, I think we will see how it evolves. We have factored, as I have explained, the two, three scenarios which kind of advises our guidance.

CVK, thanks for that color. So, at the bottom end of the band, just for clarity, when you say macro is assumed to deteriorate further, is this a scenario where the US may actually go ahead implementing the reciprocal tariffs announced on 2nd April after a 90-day pause?

I mean, I am not trying to take a guess on how exactly this will play out. A general assumption that the discretionary spending environment will deteriorate. It could be due to various factors. I mean, obviously, what you are saying is possibly the first trigger. But I am not like specifically saying only if this happens, this will happen. Generally, due to various reasons, the discretionary spending could deteriorate. And, I mean, recession and all of that, so that's the assumption.

Sure, sir. And when Ukraine war and Fed hiking cycle started in February - March 2022, the most real -time indicator we had seen was deterioration in deal - bookings by April or May months. So, how has been the deal -booking and pipeline discussions this time around in March and April months compared to December ‘24 or January ‘25 months? And are you seeing any similar pattern of deterioration in deal-bookings even now?

It may be contrary to what everybody expects. 50% of our $3 billion booking happened in March. So, we did see a very good closure. There is a sense of urgency. As I said, one of the comments, is quite possible this environment might make people make decisions faster, especially on efficiency -led, AI-led and AI and efficiency-led opportunities. So, it could play out either ways. So, we don't know how it will really play out.

Thank you. Next question comes from the line of Abhishek Pathak with Motilal Oswal Financial Services Limited. Please go ahead.

Hi. Thanks for the opportunity. CVK, just a clarification on the upper end of guidance. So, as you said, right, I mean, if you end up closing the large deal and the demand environment remains the same, in that case, should we assume an upside kind of risk to this number? That's one. And the other question I had was slightly nuanced around the nature of demand this time. You did mention that discretionary spend will again be subdued. And if we again go into kind of cost takeout sort of scenario, do you think this time the cost takeout will be AI driven? And if yes, are organizations even ready to sort of scale AI enterprise wide, which means , should we kind of, you know, be expecting accelerated spend around data and cloud and stuff like that in which scenario again, what exactly is di scretionary anymore, right? So, any color on that will be helpful because cloud and modernization ideally would be considered discretionary, but in the scenario that we are talking about, all of those spends might actually be fast -tracked. So, any perspect ive on that, that will be helpful. Thanks.

Okay, right now, our guidance is 2% to 5% and as you clearly understood the assumptions for the upper end of the range. I mean, based on Q1 bookings or how the Q1 pans out, we will give you an update. Right now, 2% to 5% is our guidance. The nature of dem and, see, today it's very difficult to think of a pure play cost optimization deal, which really means using global delivery and shifting labor and things like that. They are far and few of that nature. It's always led by some transformation, which is going to drive a reduced total cost of ownership over a longer period of time. And in this aspect, Generative AI is a huge positive trigger, like modernization of applications. They are not, I mean, obviously they are modernizing for many reasons, but one of the very important reasons is to simplify the landscape and reduce the cost of ongoing management of these platforms. So, I do believe there will be good modernization type of programs. Like in Engineering Services, there is obviously a lot of development work that happens. These are not just cost take out, but it's really creating higher capacity to innovate by leveraging a lower cost solution, right? And I think the large engineering, the mega engineering deal that we signed is really in this category. And we plan to ramp this up fairly quickly as we go through the first two quarters. Cost take -out in isolation does not exist. It's more modernization, transformation through AI, and then an outcome of that is what the efficiency benefits the clients get.

Thanks, CVK. And just a very small follow -up. Do you think the cost pressures will kind of put a little bit of a break on the GCC expansion story? Do you think vendors now become, I mean, they again become the first go -to solution for clients in this scenario?

It is very difficult to kind of respond to that. I mean, what you are saying is logically right, but I don't have a strong view on that.

Thank you. Next question comes from the line of Surendra with Citi. Please go ahead.

Yes, good evening, everyone. CVK you made a point on higher wallet share in clients where you pass back AI -led efficiencies. So, just three points on that. Could you share, firstly, the level of deflation you are seeing for existing business in those situ ations? Secondly, what happens to your revenue run rate in absolute terms on an ongoing basis with the higher wallet share gains? What are the trends you have seen so far? And third, who are you getting this wallet share from? Thanks.

Yes, so the level of deflation is something which is very dependent on what services are we delivering. If you are looking at software development, then I think the AI Force adoption is a journey. And if it is fully adopted, in fact, there are four clients who are looking at not just our portfolio of SDLC. But all the vendors in their eco system are expected to leverage the AI Force platform. So efficiency is a little broader. And in software development, we are looking like 20% to 25% when we are able to implement and the maturity picks up. And we have a number of recipes which helps drive maturity in the whole SDLC life cycle. In digital process operations, agentic solutions are very real. We believe there can be a significant reduction. And I mean, obviously we have a very modest book of business in DPO, but we are obviously going after a large installed base, both insourced and outsourced to drive this. There it can be anywhere between 20% to even 50%. And obviously this is not happening on day one. There is a roadmap, and it also requires clients to do a lot of things. So it's more of a joint journey, but with a clear vision and proof points on what can be achieved. The wallet share gained, in fact, most of the renewals that we have done. This quarter was also a very strong renewal quarter. There was incremental business from almost all the renewals that we signed. It was more than the deflationary impact. I wouldn't be able to call out anything more specific. And I hope this was able to address your question.

And the third part was who are you gaining this wallet share from?

From all our friends in the market.

That's what all our friends tell us, all your friends. And just one, sorry, go ahead.

Eventually that should reflect in the growth, right, Surendra?

No, no, fair enough. And just one last point, you shared the ACV YoY last quarter at 23%. Could you share the same data point for this quarter?

The last quarter was unique because there were a lot of questions around our ability to meet the guidance. So we were sharing the ACV data point. We are not planning to kind of share the ACV metric on an ongoing basis, Surendra.

Thank you. Next question comes from the line of Gaurav Rateria with Morgan Stanley. Please go ahead.

Hi, thanks for taking my question. My first question is on the net new deal wins. Has there been any bunching up of decisions which led to significant increase in the deal win this quarter? Or is this something that you expect more as a regular phenomena based on the kind of pipeline that you're seeing?

No, I don't think there was a bunching up. I mean, these were deals which are in the pipeline, which have been cooked for many, some of them many quarters. They converted during the quarter. And I mean, as I said, our aspiration was to significantly increase our booking from the two billion kind of range that we have had for a long time, except a couple of quarters where we had some mega deals. And as I called out last time, our pipeline was near all-time high without a deal of whatever we d elivered in the last year. So it was more well -spread, and this deal was just above our threshold of mega deals. So in spite of, even without the mega deal, we would have delivered a very strong booking in this quarter. And the pipeline is strong. We have good number of opportunities which we think will close in Q1 or H1.

Got it. Second question on, from a guidance point of view, what are you envisaging from a 1Q perspective, the usual seasonality that you see or do you think that will be covered up because of the very strong ramps from the mega deal that you talked about which is going to come in the next two quarters?

Maybe Shiv, you can respond.

So Gaurav, we do expect the Q1, it's going to be better than what it was last year, but we will have a usual seasonality again playing out. So that's what we expect in Q1.

It wouldn't be like last year, last year was an outlier. We would revert back to the normal small seasonality that will be there in Q1.

Basically, what we have signed that takes usual rhythm of ramping up, so it's going to take some time.

And it's not like a people transfer type of opportunity and we need to ramp up and that will start like a couple of weeks from now, the ramp up.

Got it. Lastly, from AI perspective, you have been talking about the aspiration of getting to a higher revenue productivity or revenue per employee. Basically, that means for the same revenue, you would have a lower workforce to deliver the same. So this reduction would be more from an offshore perspective, more onsite perspective. I am just trying to understand that fundamentally, will that mean any change on the delivery model that we have? Thank you.

I think if you see this year FY'25, revenue grew in Services 4.8% and headcount declined roughly 2%. So that's the nonlinearity that we want to build on an ongoing basis. And we envisage this execution model to be less location agnostic as we kind of get to a mix of 50% people and 50% agentic resolutions. So that's a direction we will move. It's a journey and we have seen some good use cases. There are clients who were keen to adopt it. I think the location thing will become less important, at least for half of the work. That's the way it should evolve based on what I am seeing.

Thank you. Next question comes from the line of Vibhor Singhal with Nuvama Equities. Please go ahead.

Yes, thanks for taking my question. CVK, just wanted to get some color on the vertical distribution. What is the conversation that we are having? I think some of your peers have called out specific weaknesses in the Manufacturing and Retail verticals. Because here the companies are expected to be impacted more by tariffs if at all they come in at some point in time. Given that we had called out weaknesses in the auto segment, probably falls in the industry. What are we hearing in these verti cals and do we also see these verticals to be at the brunt of the entire market also really to begin with and then maybe spillover to other verticals or is it anything different that you are seeing there in your conversation with clients?

So Vibhor, we did not see an impact in the last quarter, but we do see Retail and Manufacturing, including Auto to be impacted. But this impact is going to spill over to all the verticals very, very quickly. That is a sense we have based on just doing some analysis on how each customer is impacted and what will that impact mean to both upstream and downstream in their value chain. I think it's something which is going to be broad -based. It might show up in Retail and Manufacturing to start with, but it's only a quarter lag before it has an impact on other verticals. So this is just how we are foreseeing this to happen, though we did not have anything specifically in the last quarter.

Got it. I think the conversations that you're having with clients, say the uncertainties that they're talking about, I mean, are we able to make out that is it like a kind of a temporary uncertainty that they are waiting for the final listing of the tariffs at the end of the 90 -day period? Or do you believe they are in for a longer store and they're still not able to make up their mind about the tech spends and the way forward their business is going to be?

I think from a discretionary spend, the little bit of thinking is to wait and watch because they don't have clarity on how this would play out. That's the way I think.

Got it. But nothing on the talks of this being a temporary thing. We are just basically waiting and watching and whichever way it will happen.

Yes, that's right.

Thank you. Next question comes from the line of Yogesh Aggarwal with HSBC Securities. Please go ahead.

Hi, have a couple of questions. Firstly, on the quarter, was March weaker than Jan and Feb? Did you see any kind of weakness generally in business activity or in deal momentum?

So in fact, as I said, we had a large part of our bookings happen in March. Obviously, these were programs that we have been working on for a long time. So we didn't see anything specific reflective of the upcoming uncertainties that will impact this business except one large deal which was delayed or deferred or whatever not directly related to tariffs but due to the broa der environment.

Okay. Secondly, the guidance in the beginning of the year was 3% to 5%. And I think on organic CC terms, you are just about closer to the lower end. So were there things during the year which happened unexpectedly or were you expecting this performance to be more closer to the lower end?

Yogesh, we had very clearly articulated in January, 50 basis points is what inorganic is. So if you look at even from the start of the year, we are above the midpoint of the guidance that we gave. So I hope that answers. I can discuss this more with you later.

No, I get it. I think we were, I was adding the inorganic component from FY24, which was a spillover. So I get it. Thank you.

Thank you. A reminder to all the participants, please restrict yourself to two questions. Next question comes from the line of Sumeet Jain with CLSA. Please go ahead.

Hi, thanks for the opportunity. Firstly, just wanted to understand what is the organic growth guidance for FY26 given that the HP E asset acquisition closed on 2nd December and in this quarter you had a significant increase in your telecom vertical on the back of it. But there will be practically a nine -month impact or eight-month impact in next year of this acquisition.

So, Sumeet, we expect an additional ~1% impact on our next year's guidance because of CTG acquisition.

Got it. And secondly, in your ER&D side, I mean, we can see very strong growth in this quarter. And you also mentioned that order booking had a 75% growth in FY25. So can you just highlight what's happening in your ER&D business? Because generally, when we look at the automotive or the Manufacturing space, and ER&D is considered to be discretionary in nature. So what is the difference what you are seeing in your end markets?

I think of course 75% increase in booking, a big part of the increase happened in Q4 because we had one large deal and then the Western Union was also, there is a significant digital engineering component. Now, of course the current growth is a lot influenced by the full quarter impact of CTG integration. I think what we are seeing is, I mean, this whole thing, platform engineering, modernization, that's one thing. The second one is there is existing work that's happening in some of the semi conductor and other firms. And obviously, to enhance capacity or really do more with less, they are looking at providers like us. And then it's more widespread as well. We had some success in telecom. We had some success in tech vertical. We also saw some success in a couple of Manufacturing clients on the PLM side. So these are some of the examples. I won't be able to give you a macro trend which drives this.

No, thanks, CVK. That's very clear. And lastly, on the GCC opportunity, I can see some of your deals mentioned are around setting up GCCs in India. So can you just highlight the kind of margins you are seeing in these deals? Are they very similar to the c orporate average? And how do you see this ecosystem shaping up going forward? Is it a loss of opportunity for you, or is it sort of a new opportunity getting developed?

So Sumeet, we have had very good success in GCCs in the last six months. A very large company out of Germany has chosen us to build their entire digital capability. And these are at company level profitability. And we are also working, we have enough opportunities in the pi peline where it's a GCC, which is pretty much starting from scratch for a large firm and we become the partner. And obviously they may insource a percentage of it and we have made sure that the long-term for us is very mea ningful in these opportunities. So we are not really focused on, I mean, completely transitioning is not something which we are looking at. We should have a meaningful long -term value from these opportunities.

And maybe just a follow up to that, I mean, given that this insourcing can happen at any point in time from the GCC, does that reduce your annuity revenue visibility in the medium to long run from that particular client?

I don't think the constructs are insourcing anytime. That's not the construct that we are working on. So we have various models where it is meaningful at least three year or five year and a percentage that can get in source and things like that. Net-net, I think it is going to be a positive impact so far. Positive and when I say positive, we are constantly looking for is it long -term positive and the answer is yes.

Thank you. Next question comes from the line of Ashwin Mehta with Ambit Capital Private Limited. Please go ahead.

Yes, thanks for the opportunity. CVK, one question in terms of your software business. This is 3.5% this year improved margins by around 200 bps. And looking at the guidance, it seems to be growing almost similar to what you think the Services business would grow at? So what is fundamentally changing in terms of your software business for it to start growing at par with Services and also improve margin?

I mean, the Services growth has come down, so software has become on par with this. And software has also accelerated, which means from broadly like 1% to 2%, now it is 3.5%. I think we have done tremendous amount of work in modernizing, repositioning our analyst ratings for a number of products where in the lower quadrant, now most of them are in leaders quadrant in most of the analyst reports. And we are also significantly expanding our sof tware business in India, Middle East, and a lot of emerging markets where we see a strong demand for these products. And there are products like marketing automation where we are the best solution available for large s cale customers. In fact, several banks in the emerging markets, our existing clients and we are enabling them, we are migrating the existing base to cloud. So number of things and all of this will create a good momentum in the long term. But obviously ther e is some headwind due to conversions to term and other things. We feel good. I think our strategy is working. Things are moving in the right direction and we will keep you updated on progress.

Thank you. Ladies and gentlemen, due to time constraints, we have reached the end of question-and-answer session. I would now like to hand the conference over to Mr. C. Vijayakumar – CEO and MD, for closing comments. Over to you, sir.

Thank you everyone for joining. In FY25, our business has remained resilient due to a portfolio which is an all -weather portfolio which will deliver in the upcycle, which will deliver in the downcycle and we are being cautiously optimistic about the road ahead. We are acutely cognizant of the upcoming macro impact on the client's IT spending, and we are being nimble to capture opportunities. I think it's a great time to find opportunities to help our customers and be their trusted partner. T hank you for your support. Thank you for joining and look forward to talking to you during the next quarterly call. Thank you and good evening, everyone.

Thank you. On behalf of HCLTech, that concludes this conference. Thank you for joining us. You may now disconnect your lines.