HCL Tech Reports Strong Growth Driven by AI and Data Initiatives

Pricing picking up gradually; Q3 is a seasonally strong quarter: HCL Tech Management

HCL Tech CEO C Vijayakumar highlights strong business growth with a good mix of large and small deals, driven by GenAI components and software innovation. Despite some macro challenges, discretionary spending is increasing across sectors. CFO Shiv Walia assures steady demand, pricing, and margin outlook, with significant contributions from the software business and financial services.C Vijayakumar, CEO & MD, and Shiv Walia, CFO, HCL Tech, in conversation with ET Now. Vijayakumar says almost the entire pipeline that they are currently processing has got some GenAI component in it.AI Foundry is helping in a lot of data related innovations that clients are undertaking and they see cognitive infrastructure kind of demand for both hyperscaler environments and private AI stacks. These are the broad areas where GenAI is creating a good momentum. Good show in the second quarter, but can we expect this kind of momentum to stay put and continue? C Vijayakumar: We have delivered good growth across the board and the business momentum is starting to pick up. Of course, we are hopeful that the momentum will continue, but definitely from guidance and things like that, we are cognizant of the fact that macro issues and geopolitical environment and some client specific issues could have a certain impact. But generally, the discretionary spend is picking up beyond financial services as well because financial services we had called out a couple of months ago. Now tech and services, life sciences, retail, CPG all of them had a good mix of both discretionary and non-discretionary spend related ramp ups in the last quarter. So, it would not be off the mark if we say that the guidance is conservative and you are likely to be at the top end of the guidance comfortably? C Vijayakumar: Our guidance is 3.5% to 5% that is what we are overall comfortable with. What is expected in terms of wage hike on margins in Q3? What levers would you have from here on margin expansion? Shiv Walia: This wage hike is a planned wage hike, and I do not expect any further impact. It is already part of the forecast we have and we are comfortable with 18% to 19% margin guidance that has been given. What about the levers from here on? Tell us a little bit more on what the pricing environment is going to look like? Shiv Walia: It is steady and even the demand environment is steady, as is the pricing. It is picking up gradually. Also, Q3 is a seasonally strong quarter for us because of the seasonality in software. So, yes, other than that I guess the business as usual I would say. Mega deals seem to be now missing from the system. Throw some light on the nature of the deal wins that you have clocked. C Vijayakumar: See, the $2.2 billion wins that we had in the September quarter had a good mix of large deals and small deals. Of course, there was no mega deal in that. We had several hundred million dollar deals, but there was nothing of 250 or 500 million TCV kind of deals and these deals are by nature a little bit lumpy. It may happen; like last year in the September quarter, we had a very large deal so that helped us get to $4 billion booking. So, it would be lumpy in nature. We have several large deals in the pipeline and they would play out depending on how the decisions happen over the next two to three quarters. How has it been a pickup in the GenAI projects for you? C Vijayakumar: Pretty much the entire pipeline that we are currently processing has got some GenAI component in it. Every efficiency led programme we have AI Force which is our GenAI service transformation platform that is a part of it. Now, AI Foundry is helping in a lot of data related innovations that clients are undertaking and we see cognitive infrastructure kind of demand for both hyperscaler environments and private AI stacks. These are the three broad areas where GenAI is definitely creating a good momentum. Like modernisation is one of the best use cases where using Gen AI the speed of modernisation and the cost of modernisation could be much lower and speed is much faster. So, these benefits are definitely acting as triggers for the decision makers to consider significant retirement of technical debt which is what a lot of global companies constantly struggle with. The highlight of this quarter has been the software business. What is driving growth within this business? C Vijayakumar: In the software business, we have laid out a three-year strategic roadmap with multiple levers which includes significant capability enhancements in the product like for the marketing automation, we have the customer data platform as a plugin. Similarly, for every product, we have certain new features which are being plugged in and that is really one of the foundational aspects of the strategy. The second aspect is providing customers the choice of deployment. They could do it with a hyperscaler of their choice or in a private cloud stack. I think that also gives a lot of flexibility. Then, we have a number of features which provide licensing flexibility and we have built a very good partner network. All these foundational pieces are in place. And for all the renewals, we have a customer success play where there are teams which are exclusively focused on how we can enhance the usage of the product with different clients. All of that is showing improvements and the most important capability is that on the data side, we see Actian hybrid data platform as a very strong growth driver in the software business. So, we have done well in the last quarter, we have done well in the first half of the year. However, currently our expectation was low single digit, but we have already delivered almost 6% in the first half. We still think our aspiration is mid-single digits to be achieved in a consistent manner before we extrapolate anything further. The other strong bit was also BFSI. The Street was up almost 4%. Would you call this a sustainable benchmark? C Vijayakumar: There was no bunching up. Of course there was open demand, which we saw even at the end of June and early July, so that is what we had called out. North America financial services started earlier, largely around insurance. Insurance is where we had the maximum pickup, but in Europe across the board, the entire financial services segment did well. Same is true with the rest of the world, which is what we call growth markets. So, it is quite broad-based and in the US, maybe it is a little bit more skewed towards insurance.

Third of incremental demand coming from data and AI: HCLTech CEO

Speaking to ET, CEO and managing director C Vijayakumar declined to elaborate on revenues earned from data and AI businesses. "It (data and AI revenues) is spread across different verticals, and every client situation is different, so I'm not able to quantify it. But I think at least a third of the (incremental) demand seems to be coming from AI and data, roughly," he said.HCLTech garnered about a third of incremental demand from data and artificial intelligence (AI) verticals, helping India's third largest software services provider post better-than-expected revenue -- 6.7% higher from a year earlier -- in the fiscal second quarter. Speaking to ET, CEO and managing director C Vijayakumar declined to elaborate on revenues earned from data and AI businesses. "It (data and AI revenues) is spread across different verticals, and every client situation is different, so I'm not able to quantify it. But I think at least a third of the (incremental) demand seems to be coming from AI and data, roughly," he said. Announcing the September quarter results on Monday, the Noida-based company reported revenue of Rs 28,862 crore, up 6.7% from a year ago and 2.6% sequentially. Revenue surpassed the Rs 28,710 crore ET estimate for Q2. The company also raised its lower-end guidance for revenue growth to 3.5-5.0% from the earlier 3.0-5.0% for FY25. "To grow at 3.5%, we need to grow, maybe 0% for Q3 and Q4, and to grow at 5%, we have to grow at 2% in Q3 and Q4; that's the math on the demand environment," Vijayakumar said in a post-earnings call. "We see good demand in financial services, that's also extending to other verticals. But we are a little cautious about extrapolating this for a longer period of time. We are going to take it one quarter at a time...We believe in the mid-to-long term, of course, the levers are sustainable, but quarter to quarter, there can always be variations," he said. The HCLTech management highlighted during the call that the September quarter was marked by major achievements in generative AI programs with most deals leveraging AI, and its solutions gaining adoption for service transformation among clients. Even as clients tackle challenges in scaling up their GenAI pilots to production stage, HCLTech is seeing some bigger deals in cognitive infrastructure solutions. Vijayakumar said there are many prerequisites for successfully scaling them up. "Like getting your data strategy right, cloud strategy, your cognitive infrastructure solution right, and of course, there are aspects of what the guardrails of Responsible AI, privacy, etc. are to be looked at. Another very important element is the entire change management. How do you really scale a particular initiative to its full potential?" he said. During the earnings call, the company also noted that GenAI deals are small currently, but it is enabling investments in legacy technology modernisation, establishing data pipelines and metadata management, and cognitive infrastructure, which are bigger in deal sizes. Elaborating on cognitive infrastructure solutions, Vijayakumar said, "Whether it is Dell or HPE, it's really an on premise infrastructure which can be built on which you can run your GenAI programs. There are two options - you can either run it on hyperscalers, or you can run it on premise. We call both as cognitive infrastructure, because infrastructure is a very critical component in the GenAI journey, because all these applications are highly compute-intensive. That's why infrastructure demand is definitely going to be there because a lot of customers would want to modernise their infrastructure." He also pointed out that the adverse impact of HCLTech's divestment from its joint venture with US-based State Street Corp. has been mitigated from the September quarter. In December 2023, State Street Corp. decided to buyout HCLTech's 49% stake in UK-based joint venture Statestreet HCL Services, impacting the IT firm's financial services revenue by around 80 basis points (0.80%) each in the first two quarters of this fiscal. Going forward, Vijayakumar adds that while insourcing has deflated the total addressable market for IT services, it (insourcing) is still small. "The IT services market is very large. It is expected to see trillion dollars spends in the next couple of years. So, whatever GCCs scale up, will be a very, very small component," he said. "And there are a lot of untapped areas for service providers like us, that's where we need to focus and increase our addressable market," he said, adding that HCLTech's services share of revenue is still a third even within the Global 2000 companies.