HCL Tech Q4 Review: An Outlier Among Peers As BFSI Shines Through Slowdown

HCL Technologies Ltd. is confident of delivering the goods in fiscal 2024 after its March quarter results were "better than feared" and better than peers in a crucial business vertical.

Revenue of India’s third-largest IT services firm fell 0.35% from the previous three months to Rs 26,606 crore in the quarter ended March 31, according to an exchange filing on Thursday. That compares with the Rs 26,855.7 crore consensus estimate of analysts, tracked by Bloomberg.

HCL Technologies Q4 Results: Key Highlights (QoQ)

• Revenue down 0.35% at Rs 26,606 crore (Estimate: Rs 26,855 crore)

• EBIT down 7.5% to Rs 4,836 crore (Estimate: 4,966 crore)

• EBIT margin at 18.18% vs 19.58% (Estimate: 18.49%)

• Net profit down 2.76% at Rs 3,983 crore (Estimate: Rs 3,883 crore)

These numbers, however, don’t tell the full story.

While most metrics were down, they were in line with analyst estimates and did not shock like those of Infosys Ltd., according to an April 21 note by Girish Pai of Nirmal Bang Securities Pvt. 

What shone through brighter was HCL Technologies’ performance in the crucial banking, financial services, and insurance vertical—the biggest revenue generator for India’s IT services firms. Revenue in the segment rose 6.9% sequentially in constant currency terms on the back of demand for cloud and data-related services, as well as the ramp-up of large deals.

In comparison, Tata Consultancy Services Ltd.'s revenue growth in the BFSI vertical moderated to 9.1% in Q4 FY23 from 11.1% in the previous quarter, while Infosys’ actually fell 3.1%.

"Some of the growth indicated by HCL Technologies is running contrary to the commentary provided by both TCS and Infosys, especially within some sub-verticals of BFSI," Pai said.

The banking failures in the U.S. have had no impact on the company, as the financial services portfolio is spread across insurance, capital markets, and banking, said Chief Executive Officer C. Vijayakumar in a post-earnings interview.

That said, "a lot of the insurance firms [in the U.S.] are impacted due to the rise in inflation," Vijayakumar told BQ Prime’s Niraj Shah. "They are looking at managing their cost structures in an efficient way — better tech leverage is one solution. They are looking at how to bring in more automation to drive efficiencies and take out costs."

Other segments, however, lagged in growth — some actually shrunk. On a sequential basis in constant currency terms:

• The ERD vertical declined 3.8% due to weakness in hi-tech and telecom.

• HCL Software declined 14.6% due to a lacklustre P&P performance.

• The manufacturing segment declined 3.5% due to a one-off impact.

• Telecom and media fell 5.6% on account of rampdowns and delays.

• However, revenue in the IT services vertical, the biggest for HCLTech, grew 1.6%.

Geographically, HCLTech grew the fastest in Europe (14.6%), followed by North America (10%) and Rest of World (2%), in constant currency terms.

A more balanced portfolio mix, with momentum in apps and decent positioning in vendor consolidation and cost takeout mandates, can offset the vulnerabilities in ERD and Products & Platforms to drive peer-matching growth, according to Kotak Institutional Equities.

HCLTech CEO Vijayakumar said the same.

“While companies have downsized internal staff, there are also vendor consolidation opportunities — stronger service providers are going to gain from this,” he said.

“Overall, I think, in this macro context, HCL Technologies’ portfolio is a good mix of businesses. That’s why we feel optimistic on what we can do. We think the worst is behind us, except in a couple of clients where there may be some additional rampdowns.”

The Noida-based IT services firm has pegged its revenue growth guidance at 6-8% in the fiscal ending March 31, 2024, with IT services growth at 6.5-8.5%. That compares with 13.7% year-on-year growth seen in FY23 and services growth of 15.8%.

“The guidance seems to imply 1.5-2.25% CQGR [compounded quarterly growth rate] for FY24, which does not look steep optically,” Nirmal Bang's Pai said in the note. "However, we believe that flat price assumption for FY24 will be challenged, as HCLT has already indicated that some clients have asked for price cuts."

The FY24 guidance indicates demand moderation, according to Nomura Securities Co. “While discretionary demand has been hit due to the prevailing macroeconomic uncertainties, demand for cost takeout and automation-focused projects remain high,” the brokerage said.

Vijayakumar, on the contrary, sees three factors playing out to achieve the guided growth trajectory in the current financial year.

• The company expects new deal wins to flow into revenue in FY24. 

• The deal pipeline is strong — at near all-time highs.

• The company has continued to hire, with 3,800 net additions in Q4.

“Q1, traditionally, is muted as for a lot of contracts the anniversary productivity benefits kick in at the beginning of the year,” Vijayakumar said. “So, that will see some softness, but I think it’s a reasonable ask rate from Q2 to Q4.”

Analysts were unimpressed by HCL Technologies’ total contract value (new deal wins) of $2 billion in the March quarter, as it was 8% lower annually and 12% lower sequentially. This includes 13 large deals —10 in the IT services vertical and three in the software business.

Total bookings, including renewals, for FY23 grew by 19%.

What came as a surprise, though, was that the largest deal won in the March quarter was in the BFSI space, amid a banking crisis and general slowdown in the US.

“HCL Technologies has done better than TCS in one metric (of dealmaking). While TCS likely saw a modest total TCV decrease in FY23, HCLTech for a similar metric showed a growth of 19%,” Pai said. “There is also a great deal of optimism around the vendor consolidation opportunity, where HCLTech believes it is very well placed.”

Client spending, which has seen some moderation, is still there. 

“We are seeing a mix of discretionary and operational spends, which is playing into the ramp-ups,” Vijayakumar said. “Cloud migration, in particular, is still holding strong as there is urgency among clients.”

All said, does the CEO see his company as the outlier if it does better than what has been guided for? Will growth be the norm for the industry in FY24 or an exception?

“It is a very, very tricky question as there are probably only three or four (companies) in the peer group,” Vijayakumar said. According to him, most of the industry will deliver as projected and the outliers will be those that don’t.