HCL Tech CEO Confident in Meeting 3-5% Growth Guidance Despite Q3 Challenges

Confident of meeting overall guidance of 3-5% constant currency growth for the year: HCL CEO

The Q1 has typically been HCL's weakest margin quarter with the top line impacts which have also been seasonal in that sense and Q1 even in the previous two years has been around that 17%, which is where HCL landed up this quarter as well, says CFO Prateek Aggarwal. Typically, Q2 picks up to something like 18% and Q3 is the peak, which goes to 19% plus and then the Q4 again comes back to that same second-quarter levelC Vijayakumar, CEO & MD, and Prateek Aggarwal, CFO, HCL Tech, in conversation with ET Now. Vijayakumar says that in Q4, HCL did about $2.3 billion booking, in Q1, HCL did a $2 billion booking. They expect all the verticals and geographies, except financial services to sequentially grow in Q2. The CEO & MD is confident of meeting the overall guidance for the year, which is 3% to 5% constant currency growth. You sounded rather optimistic in your press conference last week. Has the discretionary demand environment changed, according to you? C Vijayakumar: The discretionary environment has remained the same. It has not changed in any way. We delivered a reasonably good quarter. We delivered a 5.6% year-on-year growth. It was a seasonal quarter and so there is a sequential decline of 1.6% on constant currency. Based on the good bookings that we have done, we did about $2 billion of booking and that gives us confidence going into the next quarter. In Q4, we did about $2.3 billion, in Q1, we did a $2 billion booking. We expect all the verticals and geographies, except financial services to sequentially grow in Q2. We remain confident of meeting our overall guidance for the year, which is 3% to 5% constant currency growth. What is giving you the optimism to say that all verticals and geographies, barring BFSI, will continue to grow second quarter onwards? C Vijayakumar: Q1 has been a declining quarter for us and we have a forecast for Q2. It is based on the pipeline as well as more importantly the bookings that we have done in the last two quarters, the execution of that is on track, and some of that will reflect in the revenues in Q2 and that is the confidence. There is no major change in the environment. It is a similar programme, several small and large deals are part of the booking, and all of them kind of at some point get converted to revenue and that is all built into our forecast. The Street is not convinced that you will meet the margin guidance as there will be further headwinds of acquisition and wage hikes in the coming quarters. Would you like to clarify that? Prateek Aggarwal: Even if you see our previous two years and the inter-quarter sort of trajectory, we are pretty much on the same trajectory this year in FY25. The Q1 has typically been our weakest margin quarter with the top line impacts which have also been seasonal in that sense and Q1 even in the previous two years has been around that 17%, which is where we landed up this quarter as well. Typically, the second quarter picks up to something like 18% and the third quarter is the peak, which goes 19% plus and then the fourth quarter again comes back to that same second quarter type of level, so that has been the trajectory last couple of years and we expect the same trajectory to play out this year as well. On the revenue guidance matter, the Street is convinced that you will be able to beat it given that you have not built an acquisition uptick or change in discretionary demand in your guidance so far. Would you concur with that assessment? Prateek Aggarwal: I will stay with the range and not want to guide which end of the range at this point. I think we have painted a certain forecast for FY25 and the first quarter has already happened. It has been slightly better than what we expected kind of a quarter, 0.4 better, 1.6 versus minus 2 that we had pointed out. It is not a number that sort of changes my guidance on a full-year basis. We will wait for at least Q2 to see where we are and then see if we need to fine-tune the guidance. So, the deal wins have been rather soft. Is it just a timing issue? Is there a leakage in the deal funnel? What would you attribute it to? C Vijayakumar: I think in Q4, we clocked in 2.3 billion. So, this quarter, we clocked in 2 billion. 2 billion has been our booking run rate. If you take a last whatever 12-13 quarter average, it would be in that neighbourhood. We would ideally like this booking number to go up and even in this quarter we were expecting a couple of client contracts to get signed, but which spilled over into the July, August timeframes. So, we expect a good booking overall in this year based on the pipeline that we have. It is very difficult to kind of give you a quarterly view of that. The ASAP acquisition scale has been lower than expected. How do you see it contributing going forward? And what about the HPE acquisition? Prateek Aggarwal: So, ASAP has been pretty much as per plan. There is a very good complementarity between the auto engineering capabilities that we had and what they bring to the table. So, it is developing in the right direction. This quarter was a minor blip, so that affected us a little bit. But that does not alter the rational and strategic element of that acquisition. It is playing out as expected. No major deviation. As far as the HPE CSS assets are concerned, that is something we expect to take about six to nine months, maybe more like six months now, because it has already been about a month plus that we announced. So, as and when that closes, we will be starting to publish the data on that from then. We have not called out because it is an asset carve out, it is not an entity or there are various types of acquisition. It brings us a solid set of 20 of the largest 30 clients across the telecom sector across the globe especially in Europe and Japan where we did not have that kind of hunting ground. Gen-AI, that particular part, give us some more details, the quantum of the pipeline on the AI part, types of orders which are brewing in, what are the conversation ratio of pilot projects you are having with your key clients? C Vijayakumar: Definitely, there is a lot of activity in the Gen-AI space with a lot of client conversations and a lot of work. It is very buoyant at this time. Pretty much every client, we have something on Gen-AI going on. And many of them are still in proof of concept. Some of them have moved into a defined programme. It is still not an enterprise-wide programme, but it is defined for a certain area and I indicated that we have signed a couple of deals where the TCV is in the double-digit million dollars. So, it is slowly picking up, but a lot of spend in this area is going to happen in the surrounding areas like the data and cloud and cognitive infrastructure and those are the types of spending areas that we are targeting, which are all surrounding Gen-AI, which will make Gen-AI very effective at an enterprise level.

Confident of meeting overall guidance of 3-5% constant currency growth for the year: HCL CEO

The Q1 has typically been HCL's weakest margin quarter with the top line impacts which have also been seasonal in that sense and Q1 even in the previous two years has been around that 17%, which is where HCL landed up this quarter as well, says CFO Prateek Aggarwal. Typically, Q2 picks up to something like 18% and Q3 is the peak, which goes to 19% plus and then the Q4 again comes back to that same second-quarter levelC Vijayakumar, CEO & MD, and Prateek Aggarwal, CFO, HCL Tech, in conversation with ET Now. Vijayakumar says that in Q4, HCL did about $2.3 billion booking, in Q1, HCL did a $2 billion booking. They expect all the verticals and geographies, except financial services to sequentially grow in Q2. The CEO & MD is confident of meeting the overall guidance for the year, which is 3% to 5% constant currency growth. You sounded rather optimistic in your press conference last week. Has the discretionary demand environment changed, according to you? C Vijayakumar: The discretionary environment has remained the same. It has not changed in any way. We delivered a reasonably good quarter. We delivered a 5.6% year-on-year growth. It was a seasonal quarter and so there is a sequential decline of 1.6% on constant currency. Based on the good bookings that we have done, we did about $2 billion of booking and that gives us confidence going into the next quarter. In Q4, we did about $2.3 billion, in Q1, we did a $2 billion booking. We expect all the verticals and geographies, except financial services to sequentially grow in Q2. We remain confident of meeting our overall guidance for the year, which is 3% to 5% constant currency growth. What is giving you the optimism to say that all verticals and geographies, barring BFSI, will continue to grow second quarter onwards? C Vijayakumar: Q1 has been a declining quarter for us and we have a forecast for Q2. It is based on the pipeline as well as more importantly the bookings that we have done in the last two quarters, the execution of that is on track, and some of that will reflect in the revenues in Q2 and that is the confidence. There is no major change in the environment. It is a similar programme, several small and large deals are part of the booking, and all of them kind of at some point get converted to revenue and that is all built into our forecast. The Street is not convinced that you will meet the margin guidance as there will be further headwinds of acquisition and wage hikes in the coming quarters. Would you like to clarify that? Prateek Aggarwal: Even if you see our previous two years and the inter-quarter sort of trajectory, we are pretty much on the same trajectory this year in FY25. The Q1 has typically been our weakest margin quarter with the top line impacts which have also been seasonal in that sense and Q1 even in the previous two years has been around that 17%, which is where we landed up this quarter as well. Typically, the second quarter picks up to something like 18% and the third quarter is the peak, which goes 19% plus and then the fourth quarter again comes back to that same second quarter type of level, so that has been the trajectory last couple of years and we expect the same trajectory to play out this year as well. On the revenue guidance matter, the Street is convinced that you will be able to beat it given that you have not built an acquisition uptick or change in discretionary demand in your guidance so far. Would you concur with that assessment? Prateek Aggarwal: I will stay with the range and not want to guide which end of the range at this point. I think we have painted a certain forecast for FY25 and the first quarter has already happened. It has been slightly better than what we expected kind of a quarter, 0.4 better, 1.6 versus minus 2 that we had pointed out. It is not a number that sort of changes my guidance on a full-year basis. We will wait for at least Q2 to see where we are and then see if we need to fine-tune the guidance. So, the deal wins have been rather soft. Is it just a timing issue? Is there a leakage in the deal funnel? What would you attribute it to? C Vijayakumar: I think in Q4, we clocked in 2.3 billion. So, this quarter, we clocked in 2 billion. 2 billion has been our booking run rate. If you take a last whatever 12-13 quarter average, it would be in that neighbourhood. We would ideally like this booking number to go up and even in this quarter we were expecting a couple of client contracts to get signed, but which spilled over into the July, August timeframes. So, we expect a good booking overall in this year based on the pipeline that we have. It is very difficult to kind of give you a quarterly view of that. The ASAP acquisition scale has been lower than expected. How do you see it contributing going forward? And what about the HPE acquisition? Prateek Aggarwal: So, ASAP has been pretty much as per plan. There is a very good complementarity between the auto engineering capabilities that we had and what they bring to the table. So, it is developing in the right direction. This quarter was a minor blip, so that affected us a little bit. But that does not alter the rational and strategic element of that acquisition. It is playing out as expected. No major deviation. As far as the HPE CSS assets are concerned, that is something we expect to take about six to nine months, maybe more like six months now, because it has already been about a month plus that we announced. So, as and when that closes, we will be starting to publish the data on that from then. We have not called out because it is an asset carve out, it is not an entity or there are various types of acquisition. It brings us a solid set of 20 of the largest 30 clients across the telecom sector across the globe especially in Europe and Japan where we did not have that kind of hunting ground. Gen-AI, that particular part, give us some more details, the quantum of the pipeline on the AI part, types of orders which are brewing in, what are the conversation ratio of pilot projects you are having with your key clients? C Vijayakumar: Definitely, there is a lot of activity in the Gen-AI space with a lot of client conversations and a lot of work. It is very buoyant at this time. Pretty much every client, we have something on Gen-AI going on. And many of them are still in proof of concept. Some of them have moved into a defined programme. It is still not an enterprise-wide programme, but it is defined for a certain area and I indicated that we have signed a couple of deals where the TCV is in the double-digit million dollars. So, it is slowly picking up, but a lot of spend in this area is going to happen in the surrounding areas like the data and cloud and cognitive infrastructure and those are the types of spending areas that we are targeting, which are all surrounding Gen-AI, which will make Gen-AI very effective at an enterprise level.