A quick pivot to demand helped realise good growth: HCLTech's C Vijayakumar

From a larger proportion of smaller deals, we have moved into an environment where there is a much higher share of large deals in the pipeline, says C Vijayakumar, CEO & MD HCLTech

After a disappointing performance by India’s top two IT services players — TCS and Infosys — HCLTech’s 10.8 per cent year-on-year (YoY) jump in Q4FY23 net profits, beating the Street expectations, was a breather for the sector. In an interview with Sourabh Lele and Shivani Shinde, C Vijayakumar, chief executive officer and managing director, says consolidation will be the theme in FY24 and describes how HCLTech is gaining. Edited excerpts:

Do you think the momentum of Q4FY23 will continue for your company in the uncertain macroeconomic situation?

We do see client budgets coming under pressure, because sheer inflation takes everybody’s costs up, irrespective of the business one is in. Going into CY24, there has been a cost shift. When we discussed with customers in the first quarter, we had a good visibility in our top clients about which programmes they will fund and which they may not. Based on that, we quickly reoriented our focus and our talent behind the opportunities where customers have financial support. And that quick pivot has helped.

Clients have been much more cautious about programmes, which give a longer-term return on investment (RoI). And there is more emphasis on programmes that provide a near-term RoI. To some extent, they are tying the objectives of the outcomes to the overall fee structure for the programme so that providers have skin in the game.

How do you see FY24 panning out and where will HCLTech’s strength come from?

There is a tremendous focus on efficiency and opportunities from cost optimisation. Cloud migration is also a strong theme where we are seeing acceleration. And the third area is, of course, data itself is becoming a big area customers are investing in.

The total contract value from new deal wins in Q4FY23 is down 8 per cent YoY. What is the reason for that?

Normally, deal wins can be influenced by one or two of them in either direction. But if you see the last seven-eight quarters, our deal wins have been fairly stable at above $2 billion. It has been hovering between $2.1 billion and $2.4 billion. This quarter, we came at around $2.08 billion. I don’t think there is anything you can read into it. Our pipeline is near an all-time high and we believe our booking momentum is intact.

Does this mean that on a quarterly basis the company is comfortable in closing deals around $2 billion?

Booking worth $2 billion gives a good base and we are comfortable with that. I also want to highlight that our software business did well in Q4. It’s the second consecutive quarter of good growth. On a YoY basis, software revenue grew almost 8 per cent. Another important metric is that we crossed billion-dollar annual recurring revenue in the software business. There are very few firms that have a billion-dollar ARR profitable revenue stream.

You have said FY24 will be a year of consolidation both from the demand and supply sides. Is there a trend towards larger deals?

From a larger proportion of smaller deals, we have moved into an environment where there is a much higher share of large deals in the pipeline. You can attribute that to the macro situation. Customers want to construct significantly large cost take-off programmes, and then providers like us help them do that.

Revenue guidance for next year, at 6-8 per cent, is almost half what HCLTech delivered in FY23. Do you think there is room for this to improve?

I don’t want to comment on whether we will better the numbers or not. We will update you every quarter.

In January HCLTech was planning to hire 30,000 freshers in FY24. But that target has been reduced to 13,000-15,000. What has changed in the past three months?

In January, clients had not even started their budgeting. We had to bake in some moderation of fresher hiring plans based on the demand environment. Our attrition has come down significantly. It is one of the lowest in the industry. We also want to make sure the freshers we have hired are rightfully deployed. Given all these things, we reduced our fresher hiring expectations.

In he fourth quarter, revenue from Europe grew 14.6 per cent YoY. Is the impact of the Ukraine war fading out?

I have been highlighting that in Europe, the deal velocity has slowed, and that will have some impact on the subsequent quarters. You will see some weakness in the sequential numbers that might continue for a couple of quarters.

We had a very good pipeline and booking in FY22, which helped deliver excellent growth in Europe in FY23. But with the war continuing in the continent, there is a little bit of conservatism on what they (customers) can do, especially for big programmes. That mindset probably will take some time to go.

What is the impact of the banking crisis on the company? Do you think there is a sentimental impact rather than a business impact of this?

Our exposure to smaller banks is minimal. Of the 21 per cent of revenue we get from financial services, less than 1 per cent comes from smaller banks. And the sentiment is driven by business conditions, right? For instance, insurance firms have seen inflationary pressure. So they want to find out how they can become more efficient to offset the pressures.