HCL Technologies Limited Q4 FY23 Earnings Conference Call Insights

Key highlights from HCL Technologies Limited (HCLTECH) Q4 FY23 Earnings Concall

Management Update:

• [00:02:30] HCLTECH had a good year with 13.7% revenue growth in constant currency and 18.2% operating margins. The services business grew 15.8%, while the software business grew 1.8%.

• [00:18:05] HCLTECH said its guidance for FY24 is for a 6-8% revenue growth and 18-19% operating margins.

• [00:18:38] The company’s key milestone for FY23 was achieving the INR1 lakh crore in revenue.

Q&A Highlights:

• [00:39:36] Girish Pai of Nirmal Bang asked if the 6-8% revenue guidance is front or back loaded. C. Vijayakumar CEO replied that HCLTECH believes its quarterly growth rates will follow a similar trend to the past year, low in the beginning and peaking in December.

• [00:40:44] Girish Pai with Nirmal Bang queried that regarding the volume price angle to guidance, if it’s completely driven by volume. C. Vijayakumar CEO said the company doesn’t believe there is going to be a price expansion in this environment and HCLTECH has not baked that in the revenue or margins. It’s primarily due to volume.

• [00:40:59] Girish Pai with Nirmal Bang asked about the main challenges that will affect margins in FY24? Prateek Aggarwal CFO answered that HCLTECH is taking into account the different macroeconomic conditions from last year, and have given tight guidance that takes into account potential headwinds. The company will see how it plays out and make corrections if needed.

• [00:43:08]  Girish Pai with Nirmal Bang asked about HCL Software and information about the anticipated decline in FY24 and any insights on the product space. C. Vijayakumar CEO answered that HCLTECH is not building in a decline. The company believes the software business has had a great year and the trajectory is positive.

• [00:44:13] Kawaljeet Saluja from Kotak Securities enquired what givs the company confidence in its guidance for FY24, given that bookings growth was only 4% in ACV during FY23. C. Vijayakumar CEO clarified that the growth in FY23 was driven by a $3.1 billion contribution and bookings grew around 10% YonY. The exit rate of 2.8% gives confidence that 6-8% sequential growth rates can be achieved, even with a soft 1Q.

• [00:48:39] Kawaljeet Saluja from Kotak Securities asked about the update on the mega deal slated to contribute in 1Q24. Prateek Aggarwal CFO replied that these deals have been implemented as planned and will have a full quarter impact in 1Q24.

• [00:51:49] Ravi Menon at Macquarie asked if margins can reach pre-COVID levels by year-end, and is the margin guidance cautious enough to account for any additional downturns or cancellations. Prateek Aggarwal CFO said HCLTECH’s medium-term expectation and aspiration is 19-20% EBIT. The company said it has to be realistic with its guidance due to the current environment, but it is still the goal.

• [00:53:54] Sudheer Guntupalli from Kotak Mahindra queried if HCLTECH is noticing any significant changes in client behavior vs. Sept. and Dec. quarters, apart from the usual caution. C. Vijayakumar CEO said in 1Q, most clients have visibility to their budgets and have readjusted their spend accordingly. HCLTECH did a good job in its tech and telecom verticals analyzing the budgets, and feel confident about the trajectory in insurance and capital markets. Banking could be a little muted based on their spend patterns.

• [00:57:55] Sudheer Guntupalli from Kotak Mahindra enquired how have customer budget trends changed from last year to this year. C. Vijayakumar CEO said HCLTECH is seeing moderate price increases across many sectors, especially those with high inflation impact, which is leading to many large deals in the pipeline.

• [01:02:38] Gaurav Rateria from Morgan Stanley asked if financial services outlooks in the US and Europe are different. Srinivasan Seshadri said financial services have had successful executions over the last two quarters, with North America leading and Europe trailing. Despite macroeconomic conditions, the pipeline is showing good signs.

• [01:02:48] Gaurav Rateria from Morgan Stanley queried about any benefited from vendor consolidation opportunities in any specific verticals for market share gain. C. Vijayakumar CEO said HCLTECH is gaining market share in the Financial Services, Retail CPG, Technology, and Telecom industries this year. The company has seen success in consolidating providers in Financial Services and are working on bringing new automation levers to clients in Technology and Telecom.

• [01:08:27] Gaurav Rateria from Morgan Stanley asked if the deferral in discretionary spending that occurred in March likely continue and impact the June quarter. C. Vijayakumar CEO replied that ER&D, tech and telecom have seen challenges related to offshoring, but HCLTECH expects these to stabilize with more ramp-ups and execution this quarter.