HCL Technologies Ltd (HCLTECH) Q1 FY23 Earnings Concall Transcript

HCL Technologies Limited  (NSE:HCLTECH) Q1 FY23 Earnings Concall dated Jul. 12, 2022

Corporate Participants:

Sanjay Mendiratta — Head, Investor Relations

C Vijayakumar — Chief Executive Officer and Managing Director

Prateek Aggarwal — Chief Financial Officer

Analysts:

Sandip Agarwal — Edelweiss Securities Limited — Analyst

Yogesh Aggarwal — HSBC — Analyst

Surendra Goyal — Citi — Analyst

Gaurav Rateria — Morgan Stanley — Analyst

Mukul Garg — Motilal Oswal Financial Services Ltd. — Analyst

Sandeep Shah — Equirus Capital Pvt. — Analyst

Ankur Rudra — J.P. Morgan Chase — Analyst

Ravi Menon — Macquarie Group — Analyst

Manik Taneja — JM Financial Services Ltd. — Analyst

Kumar Rakesh — BNP Paribas — Analyst

Sudheer Guntupalli — Kotak Mahindra AMC — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the HCL Technology Limited Q1 FY ’23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Sanjay Mendiratta, Head Investor Relations. Thank you, and over to you, sir.

Sanjay Mendiratta — Head, Investor Relations

Thank you, Aman. Good morning, and good evening, everyone. A very welcome to HCL Tech’s Q1 Fiscal ’23 Earnings Call. Trust you all are safe and in good health. We have today with us 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 number of 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 the 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 harbor statement in the formal investor release document and all the factors that can cause a difference.

Over to you, CVK, and thank you.

C Vijayakumar — Chief Executive Officer and Managing Director

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 partners for Global 2000 enterprises in our chosen markets, weaving ESG into our business strategy through ACT, PACT and IMPACT philosophy, and achieve top quartile TSR over the medium term.

I am happy to share that we have 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 digital application business, with cloud transformation being a central theme across all services and verticals.

We strongly believe that the market continues to look at technology to drive enterprise change, be it for acquiring new clients or business or to optimize costs or to execute upon environmental and sustainability visions. This leverage and reliance on technology continues beyond and despite the economic trends. We also saw a strong recovery in our Products and Platform 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.

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 costs and transition costs. Prateek will explain the margin walk later in the call. We have undertaken appropriate actions to improve our profitability profile, results of which would start reflecting in the coming quarters. This includes both revenue and cost levers and was led by innovative pricing, rate increases and optimization of operating costs through upskilling, increased fresher addition and many others.

From a segmental 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 currency. We are seeing a number of end-to-end Engineering Services deals in this space. We signed two large ones this quarter, one with a European ISV and another with a global ISV. Within IT and Business Services, the growth was driven by our digital applications business and the digital process operations services, which continue to ride the wave of new enterprise spending in CX transformation, IT operating model transformation and our cloud smart consulting offerings, which have become a differentiated proposition for us.

Indeed, our frontrunner credentials in cloud continues to pay rich dividends to our IT, CX service line. Note — please note this — starting this quarter, we are aligning our metrics disclosures for the Services business. In case of Services business, we will be providing you the split of geographies and verticals instead of the overall business. In terms of geographies, Services growth was led by the U.S. 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 U.S. and Europe was led by our Engineering and R&D Services segment. Among the verticals, Technology & Services and Telecom and Media were our top-performing sectors, with 10.9% and 4.3% quarter-on-quarter growth in constant currency, respectively, in the Services business. Our Life Sciences and Healthcare business grew 2.7% sequentially in constant currency. We signed a number of significant deals, such as a large global European bank selected us as a strategic partner in its cloud transformation journey and also interested with us all the cloud operations, including the hybrid cloud operations.

One of the largest health care providers in the U.S. selected us to help transform their infrastructure landscape by kickstarting its cloud running. This is one of the large largest deals that we signed in this quarter. Europe-based leading consumer goods and retail company selected us to deliver its digital, IT — digital and IT road map with cloud migration, digital workplace transformation and direct-to-consumer multichannel platform development. Europe-based Health and Bioscience company selected us to help with transition into a product-based IT operating model, underpinned by a cloud-first strategy.

Here, we are becoming the prime service provider, where the customer is consolidating from many service providers into one core strategic supplier. We’ve had a strong growth in bookings this quarter. We signed 16 large services and product deals in this quarter across diverse industry verticals led by Life Sciences and Healthcare, Manufacturing, Financial Services and Technology & Services. Our bookings grew 23.4% year-on-year, with a good mix of large and midsized deals. Our pipeline continues to remain close to record highs. It’s well distributed across various dimensions of the business.

Our talent acquisition and development focus has continued on an accelerated note. This quarter, we added nearly 2,000-plus net new employees and trained 22,000-plus employees on digital skills. We continue to leverage entry-level talent globally and are planning to hire 10,000-plus fresher this quarter. Over the last few years, we’ve evolved a robust train-to-deploy model that helps us to have the best talent in client locations at short notice. This should start showing results over the next few quarters.

We are investing in emerging technologies to further strengthen our future competitiveness. This quarter, we announced to acquire two companies, who will strengthen our vertical digital capabilities. One acquisition is Confinale, a Switzerland-based digital banking and wealth management consulting specialists, and an Avaloq Premium Implementation Partner. Through this strategic acquisition, we will increase its footprint in the global wealth management market, with emphasis on Avaloq consulting, implementation and management capabilities.

And the second is our intent to acquire Quest Informatics, an aftermarket, Industry 4.0 and IoT company, which will further bolster our Industry 4.0 offerings in the fast-growing aftermarket space. Similarly, we continue to expand our local delivery footprint across the world. This quarter, we opened a new state-of-the-art delivery center in Vancouver, Canada, which will significantly expand our presence in Canada to serve clients primarily in the Hi-Tech industry. We also inaugurated a new SAP Offshore Development Center in Bangalore. This dedicated Offshore Development Center will help enterprises harness the cloud transformation experience of HCL and SAP and accelerate their intelligent enterprise journeys.

During the quarter, we won several awards and recognitions across various business segments. Just to mention a few of them, HCL Technologies won the Microsoft Partner of the Year Award for 2022 for Healthcare and Life Sciences, global winner. We also won the U.K. Microsoft Partner of the Year Award and the 2022 Microsoft Supplier Prestige Award for amplifying accessibility through the power of data, technology and partnerships. We were accorded the honors for demonstrating excellence in innovation and implementing customer solutions based on Microsoft technology. We also won Google Cloud Global Breakthrough Partner of the Year 2021 award, recognizing our expanding partnership with Google Cloud, resulting in outstanding customer and revenue growth last year.

Moving on to our corporate sustainability agenda, continuing on our commitment to be net zero by 2040, our GHG emissions reduction target for 2030, were validated by the Science-Based Target Initiative to be aligned to a 1.5-degree pathway. We also remain committed to leverage technology to sustainable and sustainability enabling products and solutions for our clients. On this journey, we launched our first comprehensive sustainability focused solution, Net-Zero Intelligent Operations, or NIO, as it is called, which helps organizations collect real-time data around energy consumption and analytics at scale to deliver actionable insights to our clients.

Overall, in closing, we remain confident of the buying sentiment and our relevance in the market. As digital transformation is becoming paramount for clients, we are optimally positioned to support them through their digital journeys. We are evolving our services mix to better align with the IT spend patterns, leading to rapid growth of our digital business. We aim to deliver organic growth in the most capital-efficient way, employing the most sustainable profitability improvement strategies. We look forward to FY ’23 with optimism and confidence, ready to harness the disruption and seize the many opportunities that are ahead of us.

With that, I will ask Prateek to cover final details of our performance.

Prateek Aggarwal — Chief Financial Officer

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 IT partnership we had with DSP, which was discontinued last year, if we 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 at 1.3% points because of new — some units moving to higher tax slabs with the change of the financial year. The second highlight of the performance this quarter is the strong booking growth of 23.4%, coming in at $2,054 — 2 billion plus.

Most of it was from Services, $1,950 out of it and $104 million from product deals. The net hiring was at about 2,100. Last 12 months net hiring was at 34,000 employees during the last 12 months. Interesting to note, 19% is the Services growth and the growth in headcount is about 19.5%. So it’s pretty much in line. Obviously, there are quarterly differences. Good account mining resulted in $100-million-customer categories growing by three customers on a year-on-year basis. And similarly, $50 million customers grew by 5 numbers on an annual basis.

Looking at it from a vertical and geography perspective, Europe grew the fastest in geographies at 22.5%, Americas at 17.5% and the rest of the world at 18.2%. And verticals, Technology & Services was the highest growing at 34% year-on-year, P&P and Publishing & Entertainment was at 29% — 29.2%, Manufacturing at 19% and so on. Most of the verticals grew at significant double-digit levels.

Moving to the margins; the quarter-on-quarter margins declined by about 90 basis points. The Services margin drop was higher. It was around 130 basis points, 140 basis points, which got compensated by the margin gain in the P&P business. So that offset the large part of it. And the Services margin dilution is driven by the seasonality of the first quarter. As most of you know, the first quarter for us is [Indecipherable] with the number of customers contracts where we have productivity commitments, etc.

So the revenue line does dip a little bit compared to the consequent — consecutive 5% growth we were showing on Services in the last three quarters. So that obviously drops down to the EBIT margin as well. And supply-side pressures continue. There is also increased travel and H1B visas this quarter. And we are seeing outsourced services going up as can be seen in the cost detail that we’ve provided.

To put that all in basis points, outsourced services and subcontractor third-party providers affected our margin by 100 basis points. And there was an additional 50 basis points impact of basically attrition and retention and costs of managing the employee base. The travel and leisure costs amounted to another 35 basis points. And there was an exchange gain of about 40 basis points to offset some of that impact. And the seasonality impact is also recovered partially from operational efficiencies as well.

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. Against the continued pressure on the supply side, we have started to seeing some results from our coordinated efforts on both the top line as well as the cost side. Bill rate enhancement successes in pockets are expected to pick up steam in the next few quarters and cost initiatives in terms of fresher billing and pyramid optimization as well as utilization improvement, offshoring of work, automation initiatives and optimizing the outsourced and subcontractor costs are the levers that we are banking on to get back into the guided rates on margins. We remain optimistic to end FY ’23 within our guided EBIT margin range, albeit towards the lower end of the range.

Moving on from the EBIT line, higher other income; we had higher other income this quarter due to some property disposals, and that helps. That and forex gains of $10.5 million helped prop up our income for the quarter. Cash generation over the last 12 months came in at OCF, operating cash flow, of about $2 billion, $2,013 million, to be precise and free cash flow of $1,762 million, $1.76 billion, which as a percentage of net income is 112% and 98%, respectively. The balance sheet remains strong with gross cash of $2.25 billion.

And obviously, we have our work cut out to improve on the DSO in the coming quarter. From a shareholder return perspective, the EPS for the last 12 months, diluted EPS is just over INR50, INR50.06, to be precise, which is an improvement of 0.6% on a sequential basis and 2.8% on a year-on-year basis. And the Board has approved a dividend of INR10 for the quarter, which was the rate we were running at even towards the last three quarters of the last fiscal year. The record date for the dividend is July 20, and the payment of the same shall be on August 2.

With that, I finish my commentary for the quarter, and over to moderator for Q&A please.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Sandip Agarwal from Edelweiss. Please go ahead.

Sandip Agarwal — Edelweiss Securities Limited — Analyst

Yes. Hi, good evening and thanks for taking my question. So, 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 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. That is quite a sharp margin.

I understand that our attrition has gone up, and it is not showing up so badly because Products and Platform has helped us a lot. So what are the components there? Why you are getting so badly impacted? And when do you see — how — 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 numbers. So if you can elaborate a little bit on that?

C Vijayakumar — Chief Executive Officer and Managing Director

Yes. I’ll provide you a commentary on the recruitment and headcount addition, and Prateek will get to the next level of details on margins. See, if you see, Sandip, 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 hiring was — 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 pressures that would be main reason. And we continue to have the same 35,000 — we’d indicated 30,000 to 35,000 and we stay with the same range for freshers. In fact, this quarter, we plan to onboard 10,000 freshers, which will be one of the highest number of freshers that we’ve onboarded in the past five or six quarters. So with that, maybe, Prateek, you can explain the margins.

Prateek Aggarwal — Chief Financial Officer

Sandip, I pretty much covered most of the response to your margin question. As you can see from the walk that I provided, outsourced services is the largest contributor to the 130-odd basis point drop, which is 17.6% dropping to 16.3% on the Services side. And 100 basis points is just from outsourced services and subcontractors. Some of this is driven by our entry into some of those new frontier and focus countries, the seven plus five countries that we’ve been talking about over the last year, 1.5 years, where we’ve had to go for outsourced service providers at least to start with and over a period of time, we would look to optimize. And some third-party contractors have also gone up.

So that has been the biggest one and we talked about the ongoing supply side pressures related to attrition and the retention cost and just managing the workforce, which has become pretty standard over the last one year, at least. So — and the return of some of the travel and leisure costs. So those are the reasons. Equally, I read out a long list of five or six levers that we are banking on to improve the margins, and that’s the reason we kept the margin guidance the same as what we provided at the beginning of the year. So we are looking to get back into the margin range that we provided.

Sandip Agarwal — Edelweiss Securities Limited — Analyst

Okay, great. Thanks. That’s all from my side. And best of luck for the quarter.

Prateek Aggarwal — Chief Financial Officer

Thanks, Sandip.

Operator

Thank you. The next question is from the line of Yogesh Aggarwal from HSBC. Please go ahead.

Yogesh Aggarwal — HSBC — Analyst

Yeah. Hi, thanks. Just a couple of questions. Just a couple of questions. If I look at the verticals, seven — six, seven of your 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 is it anything — were you expecting this? Is it reflective of any kind of slowdown in spending? And secondly, on pricing, 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 — Chief Executive Officer and Managing Director

Yeah. So Yogesh, I think this — just look at the year-on-year growth numbers. All the numbers are very impressive, Technology & Services 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 are seeing.

Yeah. Pricing, yes, I think it’s not that we have not initiated. We have had conversations with a number of clients, and we’ve seen some modest success, which — some of that will materialize or we have some agreements which will kind of start in the coming quarter or this quarter. We have not — I mean, we’ve gone through a very logical reasoning on what we need from our clients on the current increased wage inflation. And our customers are very considerate in either changing a little bit of the delivery model or giving us some additional pricing. So far, we have not seen a situation where, I don’t know, most of the maybe 70%, 80% of them have always had a very patient hearing. And they’re looking at us and working with us to see how to kind of help us through this increased wage inflation.

Yogesh Aggarwal — HSBC — Analyst

Thank you, Vijay. Thank you.

Operator

Thank you. The next question is from the line of Surendra from Citi. Please go ahead.

Surendra Goyal — Citi — Analyst

Yes. Hi, good evening, everyone. 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 — seem to imply the same thing. So could you just help us understand that a little better, please?

Prateek Aggarwal — Chief Financial Officer

Yes. Suren, I did say we would be in the margin band of 18% to 20%, albeit at the lower end of that band. Yes.

Surendra Goyal — Citi — Analyst

For the full year or for the end of the year? That was my…

Prateek Aggarwal — Chief Financial Officer

Full year.

Surendra Goyal — Citi — Analyst

Full year. Okay. And just — 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.

C Vijayakumar — Chief Executive Officer and Managing Director

See, Surendra, it’s very difficult to call it out. We are looking at even — at least the deals — managed services deals, which where we give a year-on-year activity benefit. We are obviously having some provisions to negotiate the cost of living adjustments. So obviously, that is a lever that we can emphasize a lot more because contracts with our own provisions. And of course, the good part of our Engineering and R&D Services and the digital business, there is a significant amount of capacity-based time and material kind of operating models. So there, we are obviously selecting right skills where we need more and in some areas across the board. And we see signs are open, but it is just taking time to conclude some of these things.

Surendra Goyal — Citi — Analyst

And just one last clarification, CVK. So this quarter did not have any one-offs in the form of pass-through revenues or anything like that on Services, which might have impacted margins?

C Vijayakumar — Chief Executive Officer and Managing Director

No.

Surendra Goyal — Citi — Analyst

Sure. Thanks a lot.

Operator

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

Gaurav Rateria — Morgan Stanley — Analyst

Hi, thank you for taking my question. 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 higher than what we expected?

C Vijayakumar — Chief Executive Officer and Managing Director

Yeah. See, when we did the planning for a year — 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 then as Prateek talked about, some of the outsourcing costs are also a little bit reactionary steps that we had to take to continue to fulfill some of the commitments in certain geographies where we could not do the right people mobility solutions. So we had to resort to some higher price outsourced services, which also had some significant impact in the quarter.

Gaurav Rateria — Morgan Stanley — Analyst

All right. Thank you for the detailed answer, CVK. So should one assume 1Q to be bottom for the margins? And this is in context of the wage hike that we are likely to see through in the coming quarters. Are we likely to absorb all of that and 1Q should be the bottom for the margins? How should we think about the progression going forward, keeping in mind the puts and takes that we have?

C Vijayakumar — Chief Executive Officer and Managing Director

Yes. I think if you — you can see our margin trends in the past three years. It does take kind of a trajectory. Usually, Q1 has been the lowest margin quarter across the last two, three years. I think that’s a similar trend that we will see. And whenever we have this salary increase, that quarter, mostly, we have offset the salaries increase spend through optimization because if you just see the sequence, in April, the productivity step-downs happen. And some of the related cost-outs also start happening at that time, and they really start showing more results in the Q2 when the salary increase also hits. So generally, we’ve seen an improving trend from Q2 onwards, and we hope to see the same this year as well.

Gaurav Rateria — Morgan Stanley — Analyst

Thank you. All the best.

C Vijayakumar — Chief Executive Officer and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Mukul Garg from Motilal Oswal Financial Services. Please go ahead.

Mukul Garg — Motilal Oswal Financial Services Ltd. — Analyst

Yes. Hi, good evening, everyone. CVK, really sorry to just continue on the margin part, but I’m still a bit unclear on how the margin trajectory will flow through for next three quarters given that is requirement for you to meet the lower end of your guidance? Do you — a, do you expect the pricing impact to compensate for the wage hike, which is going to come up over the next two 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, we also will have the P&P seasonality impact in Q4, which obviously impacts our overall profitability. How much is your confidence on meeting the lower end of the guidance band given the numbers we have delivered in Q1 and the potential impact in Q4 from P&P?

C Vijayakumar — Chief Executive Officer and Managing Director

I think we — 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.

Mukul Garg — Motilal Oswal Financial Services Ltd. — Analyst

Right. So there is enough — there are enough levers for you to kind of bake in both the impacts, including the Q4 impact and reach 18%?

C Vijayakumar — Chief Executive Officer and Managing Director

Yeah. So I think for Q4, we have a couple of more quarters of all the levers to play out. So obviously, Q4 will always be a little lower than Q3. But Q2 and Q3, we’ll see an uptick. There could be a little moderation in Q3 — in Q4.

Mukul Garg — Motilal Oswal Financial Services Ltd. — Analyst

Sure. And the second question, again, sorry, just a clarification on your earlier comment about the utilization improving. I know you don’t share the figure, but in the context of low employee addition this quarter, higher attrition and elevated fresher intake, was there a meaningful positive actual movement in utilization in Q1? And should we assume that there will be a moderation next quarter as you ramp up the fresher onboarding?

Prateek Aggarwal — Chief Financial Officer

Yes. So Mukul, since we don’t publish the number, I’m not going to give you a quantitative answer for that. Utilization continues to be a lever for us to improve because we have hired 34,000 people, which includes a lot of laterals as well as a lot of freshers. So as you can imagine, the training and deployment of those freshers does take a little bit of time. So utilization continues to be a lever that we are looking at to deliver some of the gains in margins that we talked about.

Mukul Garg — Motilal Oswal Financial Services Ltd. — Analyst

Understood. Just one final clarification of — what was the revenue shift which happened from P&P — to P&P from IT in Q1? If you just share the quantum?

Prateek Aggarwal — Chief Financial Officer

Yeah. So Mukul and everybody, that is just the — some of our products — actually DRYiCE is the brand, which is the internally developed products, which we have moved under P&P because that’s the nature of the products, it’s a software product. So when we do that intersegment transfer pricing, that $13 million that you see in the intersegment elimination as negative $13 million, that $13 million is appearing both in P&P revenue as well as in ITBS revenue. And potentially, that number will continue increasing not only because of DRYiCE, but also as ITBS and potentially ERS start selling more and more of our software products, that number would continue to grow up — go up.

Mukul Garg — Motilal Oswal Financial Services Ltd. — Analyst

Sure. Thanks a lot for answering the question. I will get back into the queue.

Prateek Aggarwal — Chief Financial Officer

Thanks Mukul.

Operator

[Operator Instructions]. We take the next question from the line of Sandeep Shah from Equirus Securities. Please go ahead.

Sandeep Shah — Equirus Capital Pvt. — Analyst

Thank you for the opportunity. Can you hear me?

C Vijayakumar — Chief Executive Officer and Managing Director

Yes, please go ahead.

Sandeep Shah — Equirus Capital Pvt. — Analyst

Yes. 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 is higher versus the other levers, which you called out? And third, you believe most of the margin uptick will happen in 2Q, 3Q as CVK has called out?

Prateek Aggarwal — Chief Financial Officer

Sandeep, we are at 17%, right? We have all done believing 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 in 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.

Sandeep Shah — Equirus Capital Pvt. — Analyst

Okay. Okay. So Prateek, I 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?

Prateek Aggarwal — Chief Financial Officer

We believe it is achievable. That’s why we are staying with the guidance.

Sandeep Shah — Equirus Capital Pvt. — Analyst

Okay. Okay. And just second question, in terms of this quarter’s FCF generation — yes, yes. Just a follow-up in terms of this quarter’s free cash flow generation has been weaker in this quarter. So what is the reason for the same?

Prateek Aggarwal — Chief Financial Officer

That’s something which is a momentary listing. Some clients collections got delayed. Almost half of that delay, we have already caught up in the 10 days, 11 days that have gone by July itself. So that’s something which will come back — most of it should come back next quarter itself. Hopefully, most of it will be back in July. So that’s just a small listing.

Sandeep Shah — Equirus Capital Pvt. — Analyst

Okay. Thanks and all the best.

Prateek Aggarwal — Chief Financial Officer

Thanks Sandeep.

Operator

Thank you. [Operator Instructions] We take the next question from the line of Ankur Rudra from J.P. Morgan. Please go ahead.

Ankur Rudra — J.P. Morgan Chase — Analyst

Thank you. My question essentially is on the guidance on 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 — Chief Executive Officer and Managing Director

Yeah, of course, Ankur. That is heavily influenced by Q1 performance. So we have to recognize realities, that is the Q1 performance. So that’s really the primary factor. So some of the things that we expected did not happen. So we are just backing that and then kind of looking at a lower end of the guidance band.

Ankur Rudra — J.P. Morgan Chase — Analyst

Okay. Just looking at, CVK, in the last 1, 1.5 year, has there been any change in the threshold margins or type of business you’ve been accepting as new orders?

C Vijayakumar — Chief Executive Officer and Managing Director

No. In fact, our threshold margins, as we speak, we have significantly increased our pricing. Of course, when we — a lot of digital business execution needed us to invest a little bit more upfront in some of the transformation deals. And that, of course, has some impact on the margins, and that have also slowly come off as these programs reach into a normal execution cycle. So we’ve had some tremendous growth. We’ve had a 19% growth year-on-year in Services. It’s probably the highest growth — close to the highest growth in the industry. So that has come — a large part of it has come from our Engineering Services and our digital business.

So some of them is because of the uniqueness of these programs and the criticality of the client relationships. We have done a few things to ensure that we execute very well. And we’ve also invested a little more consulting effort to make sure these transformation commitments that we have made, like the whole IT operating model change has required a significant amount of effort on change management. And our positioning here is quite different from a lot of other similar service providers. So all of that has meant we’ve built some extremely good client roster, very, very impressive digital transformation programs. It’s coming at a slightly higher cost to start with, and we know exactly where the levers are to optimize, and we are [Indecipherable].

Ankur Rudra — J.P. Morgan Chase — Analyst

Thank you. Just to change track lastly, given what your portfolio is today, how do you think this could weather a slowdown or a recession, if it happens in the key markets?

C Vijayakumar — Chief Executive Officer and Managing Director

I think we have the best balanced portfolio. I think the P&P, first of all, is extremely distributed across geographies and verticals. And in the past, trends also indicate that P&P will be — any kind of slowdown, P&P will still continue to deliver. So it’s a very neutral to some economic slowdown. And the rest of the Services business, I think our mix between change and run are quite balanced. And as we see, we see a significant number of large deals in the pipeline. And we believe our booking momentum will continue, and we will do much better in booking this year, given the solid start that we’ve had in the first quarter. And that obviously means it’s helping us to do well in the subsequent quarters and probably in FY ’24 as well.

Ankur Rudra — J.P. Morgan Chase — Analyst

Thank you. I appreciate the color.

C Vijayakumar — Chief Executive Officer and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Ravi Menon from Macquarie. Please go ahead.

Ravi Menon — Macquarie Group — Analyst

Hi. Thank you for the opportunity. The first question is on the Products and Platform business. I think we are hoping to get some metrics to help clients track the transition to the subscription. I don’t think we found that in the release. So I was wondering if you are planning to provide that in Q1 as you had said earlier.

C Vijayakumar — Chief Executive Officer and Managing Director

Yes. Ravi, 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.

Ravi Menon — Macquarie Group — Analyst

Thank you Vijay. And secondly, how should we think about your fresher hiring. This is a new thing that you’ve than you have traditionally been a natural heavy hiring company. So having taken in 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 it as that rather than any demand side changes?

C Vijayakumar — Chief Executive Officer and Managing Director

Yes, I think we’ve built up some capacity, and they were getting ready to get into prime time. And we leveraged that — but we have a big plan for this quarter. We plan to have a 10,000-plus freshers. In last quarter, we had 6,000 plus.

Ravi Menon — Macquarie Group — Analyst

One last question.

C Vijayakumar — Chief Executive Officer and Managing Director

[Indecipherable] for us it’s taking a little longer, if you take the average time to make a fresher billable or productive. In some parts of our business, it’s taken longer. And there also, we’ve adopted a number of steps to reduce it. And in this batch that we are onboarding with 10,000, we think the outcomes will be much better.

Ravi Menon — Macquarie Group — Analyst

It sounds like you have an idea to structurally move down the overall cost that I mean — so should we think — if we take a medium-term view, should we think that we are looking at gross margin expansion from current levels?

C Vijayakumar — Chief Executive Officer and Managing Director

Yes. I think our 18% to 20% is what we think we should get to, and I think we have some work to do. And I’m very confident that all the levers that we are working on will enable us to improve the overall margins.

Ravi Menon — Macquarie Group — Analyst

Right. So one last thing, at this — are you factoring in the rupee depreciation in this at all or this is in as of the current currency?

C Vijayakumar — Chief Executive Officer and Managing Director

I mean we’ve factored in what it is as of 30 June. Beyond that, I don’t think we have done any factoring of that.

Ravi Menon — Macquarie Group — Analyst

Okay. Thank you. Best of luck.

C Vijayakumar — Chief Executive Officer and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Manik Taneja from JM Financial. Please go ahead.

Manik Taneja — JM Financial Services Ltd. — Analyst

Hi. Thank you for the opportunity. 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 actually has relatively been subdued. So how should we be thinking about this trajectory going forward?

C Vijayakumar — Chief Executive Officer and Managing Director

Yes. I think some additional capacity that we have built up got utilized. And if you look at our year-on-year employee headcount, addition is quite in line with the revenue growth. So I don’t think you should read anything into this quarter’s dip in net hiring.

Prateek Aggarwal — Chief Financial Officer

I think given the 10,400 numbers that we’ve already given for — just for freshers for next quarter, that itself tells you the way the wind is blowing, right?

Manik Taneja — JM Financial Services Ltd. — Analyst

Sure. Thank you.

C Vijayakumar — Chief Executive Officer and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.

Kumar Rakesh — BNP Paribas — Analyst

Hi. Good evening again and thanks for taking my question. CVK, my first question was to you. A little longer term, over the last year or so, we have been one of the most active companies in terms of employee management. We were the first — among the first company to move to work from home. We also rolled out onetime 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 stabled. I understand this has been a unique experience for the industry, how attrition has panned out. But what is our learning at the end of this entire exercise and this transition?

C Vijayakumar — Chief Executive Officer and Managing Director

Rakesh, great question. I think you have to take some comfort in the fact that attrition numbers for HCL is 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 have definitely helped reduce it. But you have to see the systemic trend in the industry. I think that we 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 believe it will start stabilizing. Maybe we’ll have one more quarter of pain. But after that, it should stabilize.

Kumar Rakesh — BNP Paribas — Analyst

Fair enough. If I could just understand one part on the margin side. So a couple of — two main levers for our margin, one is the aggressive fresher hiring and hence managing the pyramid to benchmark it against larger peers and also the price hike. Now both of this could come at risk if the demand slows down. So in such a scenario, are we confident that rest of the levers are enough to support our margin or there could be a potential downside to create margin in case there is a demand slowdown?

C Vijayakumar — Chief Executive Officer and Managing Director

Rakesh, three primary levers, which is your average people cost, that’s one lever, the second lever is utilization, and the third lever is realization. So I think we have all the three levers working. And I don’t see the demand slowing down because if I look at the pipeline and the large deals momentum, I feel pretty positive. Maybe slightly there could be a change in the demand pattern. But I think overall demand outlook is really booking has been good. Our pipeline is at an all-time high — near all-time high. And we also feel good about the outlook for this quarter in terms of bookings. So I don’t see a slowdown kind of scenario, at least in the near future.

Kumar Rakesh — BNP Paribas — Analyst

Thank you. Thanks a lot.

Operator

The next question is from the line of Sudheer Guntupalli from Kotak Mahindra AMC.

Sudheer Guntupalli — Kotak Mahindra AMC — Analyst

Yeah. Thanks for giving me the opportunity. Prateek, you guided for 18% to 20% margin three months back and now adding a caveat that 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 act the guidance plan and make it more prudent/realistic in line with change situation, why that inertia and the guidance plan?

Prateek Aggarwal — Chief Financial Officer

That’s more about how to handle communications. We are keeping the same guidance range. We are 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 continuing around with the range itself. I don’t know if that answers you or you looking for something else.

Sudheer Guntupalli — Kotak Mahindra AMC — Analyst

No, fair enough. Secondly, CVK, we do agree that year-on-year numbers look optically good. But we also need to note the point that our recovery from COVID waves happened relatively later than some of our competition. And especially, first half of FY ’22 was not very great for us, like it has been for the rest of the industry. And then more so in the case of June ’21, which was impacted by second wave — COVID second wave also in India. So if you keep aside the year-on-year trends for a minute and look at the sequential trends, don’t you see or you think it’s correct to interpret that there is a significant slowdown that we are seeing in the momentum?

C Vijayakumar — Chief Executive Officer and Managing Director

No, numbers don’t reflect that because if you take out the Q1 of last year, Q2, Q3, Q4, we grew 5% sequentially, 5% plus sequentially in Services. Now followed by that, we have about 2.3% sequentially. So I mean year-on-year, trend is just math, right? Over the last 4 quarters, we have grown 19%.

Prateek Aggarwal — Chief Financial Officer

So equally, I think we need to keep certain — I mean, I don’t know, call it seasonality, but there are the productivity commitments that we’ve given to several of our clients, which kicked in, in April for us. This is — not this year, not last year, this has been there for several years together. So I mean, world over, I mean, growth is best seen on a year-on-year basis. And that’s why we always look at that. Of course, we look at sequential also. But because of this seasonality that I already mentioned, it is expected that the June quarter would be a little lower than the going-in rate that we saw in the previous three quarters.

Sudheer Guntupalli — Kotak Mahindra AMC — Analyst

Thanks Prateek. Thanks CVK. All the best again.

Prateek Aggarwal — Chief Financial Officer

Thank you.

Operator

Ladies and gentlemen, due to paucity of time, that would be our last question for today. I now hand the conference over to Mr. C. VijayaKumar for closing comments. Thank you, and over to you, sir.

C Vijayakumar — Chief Executive Officer and Managing Director

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 have seen in this quarter. We have some work to do on the margins front, which we are working very diligently, and I’m very confident of improving the trajectory from there on. With that, thank you for your time, and have a good evening.

Operator

Thank you very much.

Prateek Aggarwal — Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]