Q2 Review | HCLTech MD On Q2 Report Card & FY24 Growth Outlook
#Q2WithBQ | HCLTech MD and CEO C Vijayakumar explains why company cut growth guidance despite strong deal wins. #BQLive
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00:00 Well, thanks for tuning into this conversation with HCL Technologies. They delivered,
00:03 well, a slight miss versus consensus on the revenue, but better than expected margins,
00:08 18.5 versus estimates of 17.5. Solid order bookings as well. As for brokerages, the other
00:13 highlight was the cash conversion in the first half, the free cash flow to net income of 139%,
00:18 and higher dividend on the positive side, and the guidance cut being the negative.
00:23 CBJ Kumar joins in to put the contrasting factors into perspective for us. CBK, great having you.
00:28 Thanks for taking the time out. Disappointed that the revenue numbers didn't quite live up,
00:32 or happy with the fact that the deal wins have been absolutely fantastic.
00:36 Overall, I think it's been a very good quarter for us, Neeraj. If you look at it from revenue
00:46 perspective, actually, the revenue also needs to be broken down into just the revenue, which is
00:54 really services. And then there is always some assets which go into some services. So that asset
01:01 component had reduced by about 25 million. So if you take this, if you kind of combine it, it looks
01:07 like half a percent organic growth. But if you really take out the asset, then it is it's 1.5%.
01:12 So generally, very good momentum on services side as well. But our own expectation was we
01:19 should have done a little bit more on services. I think we executed very well. A lot of investments
01:27 that we've made in the past, when freshers and all the talent development efforts, a lot of them got
01:33 into billing, which really helped us improve our margins. And we obviously operated with a little
01:41 more tightness to ensure that we can improve our margins, which again, has delivered good results.
01:49 And bookings, of course, we have taken away share from several providers on this
01:55 cost optimization led transformation programs, or transformation led cost optimization programs.
02:04 So the 4 billion booking is very reflective of deals. Some of them are really share gains from
02:12 others. Some of them are new opportunities on which clients are spending. And the good part of
02:19 this is we only declared net new deals, which are firm signed deals. They're not rate cards,
02:26 they're not framework agreements. So it potentially starts translating to revenue in three to six
02:32 months in a very predictable manner. So that is what this big booking is what has given us
02:38 hope for that the execution is on track and we will do very well in the second half. So,
02:46 given the first half itself, the discretionary spend did not pick up as much as we would have
02:52 liked. So that is the reason we had to kind of reduce the guidance for the full year.
02:58 Did the deal, you had mentioned this to me at the end of Q1 that you expect the deal bookings
03:02 to be strong, despite what happened in Q1, which is an aberration. Did you anticipate it to be this
03:08 strong? Or does this come as a surprise to you as well? No, we were expecting this because of
03:13 the nature of pipeline and the conversations that we've been having with our customers.
03:18 Because 2 billion is the normal run rate. So when you have a very large deal,
03:22 4 billion is a logical kind of expectation. Okay, a brokerage on one of your peers,
03:29 but the point that they made was that while the TCV is strong, growth is not coming because,
03:36 I would love to have this perspective from you. They say that or their belief is that the growth
03:39 is not coming because while the large TCV driving half of the growth for IT companies,
03:45 the flow business, which is scope expansion, smaller deals, etc. and running the other half,
03:49 wherein there seems to be a problem. Would you concur? Could you give your perspective here?
03:53 Yeah, I think when you look at, for every company, we need to analyze whatever is the
04:01 TCV announcements that they make, and the revenue growth and how correlated are they.
04:06 And when you announce, include your renewals, when you include some kind of rate card and
04:14 framework deals into your booking, your booking numbers looks high, but they don't necessarily
04:21 correlate well with the revenue growth momentum. I was just listening to some conversations.
04:26 That was the point everyone was trying to get more clarity on. But if you announce net new wins,
04:35 like the way we are announcing, we see a very strong correlation to our deal win that we
04:42 declared to the market and the revenue growth. It is an 85 percent correlated. And if you do
04:50 the analysis for others, it is not so well correlated. It is because the renewals,
04:56 it might add to the booking, but it is actually going to not add any revenue.
05:00 Because mostly renewals will come with some productivity benefits. So, it will only go,
05:07 reduce your existing book of business. So, I think it is all on the nomenclature and the
05:12 definition of what are we kind of disclosing as order book. And I wish everyone has a common
05:19 definition, then things will be easier. Yeah, I don't think that will happen. So,
05:23 in which case, CVK in your case, independent of how when the flow business picks up,
05:28 you believe these large deal wins will lead to revenue growth. If the flow business picks up,
05:32 then it adds luster. Yes, exactly. And when do you reckon the flow business kind of improves
05:39 from any particular quarter? We continue to have flow business. It is not that it is zero,
05:43 but I think it is definitely much lower than what it was in the last year, for example. So,
05:49 I really cannot take even a judgment call on when the flow business will pick up. But it
05:59 feels like things have bottomed out, but the world is so volatile. So, you do not know what happens
06:05 when. So, we have to take that with a pinch of salt. Can imagine. So, in which case,
06:11 just to sum up this argument, or rather this conversation, CVK on this part, your confidence
06:17 about the growth in the second half, despite the fact that you had to marginally bring off your
06:23 guidance stems from the fact that your reportage enables you to ensure that the deal wins
06:28 translate into revenue in the second half. Absolutely.
06:31 Got it. Okay, great. Margins are looking solid, attrition seems to be an issue behind you,
06:37 would that be a safe assumption? Yes, our attrition is today the lowest in
06:41 the industry. We are very happy, very proud of that. We have managed to contain attrition
06:47 and meaningfully, it is the lowest in the industry. And we would want to maintain it.
06:55 And that is what is the comfortable range for us. Okay, one factor that the street seems to be
07:00 noticing for the three IT majors, including you that have come out with numbers is the headcount
07:07 reduction, it is lowest at your end versus the others, but relatively all three have brought
07:13 down headcount reduction. Is this signaling or indicative of some things, CVK, or not to read
07:18 too much into it? No, I think it is just rationalizing the big increase in headcount
07:25 that happened in FY21 and FY22 and 23. A lot of us hired a lot of freshers and when the demand
07:33 situation was really exuberant, then we hired a lot of people. So, we never, I mean, at least in
07:43 some pockets, we did not measure utilization and all of that in a very rigorous way. So, now that
07:49 market is slightly soft, so we are really spending time to making sure every one of our engagements
07:56 run efficiently. If there are excess people, they get moved into new projects, then the freshers
08:02 who are getting trained, they need to get built. So, all of that emphasis on those aspects have
08:07 gone up. So, we are all leveraging internal talent pool to do the fulfillment at this point.
08:13 Okay. CVK, last two questions. One is this, the cash conversion, the fact that the dividend has
08:21 been very high as well, soft aspects, but any comments there? Yeah. See, we have always
08:28 mentioned that quality of business is a very important metric for us. We want to grow business
08:33 in a very capital efficient manner. We want to continue improving our return on invested capital.
08:40 So, that has been a guiding principle in how we do deals and how do we really look at
08:46 any of the internal initiatives. We focused a lot in bringing down DSO. DSO has come down by 5 days,
08:54 which is probably one of the lowest that we have ever had. Even from an industry perspective,
09:01 it is the lowest. So, a lot of very strong operational efficiency measures,
09:07 which have really helped us to deliver very good cash flows, our cash flow conversion is at a 5
09:14 year high. So, capital efficiency, ROIC metrics are also very important metrics, which we keep
09:21 in mind if you have to deliver a very good value to the shareholders. Okay. Last question. The
09:30 street, us commentator, financial commentators are all used to trying to think of what IT companies
09:36 can do over 18 months, they always used to be visibility, so on so forth. Would you shy away
09:41 from trying to think that far out? Because of what you precisely said, the world is very volatile.
09:48 So, would you shy away from predicting stuff that far out and take it a quarter or a half at a time?
09:53 Yeah, I would prefer to do it in smaller kind of time horizons, while not losing sight of the fact
10:03 that technology adoption and technology intensity is going to continue to increase across all
10:10 dimensions of industry and in life. So, that is always going to be a very positive trigger for
10:17 the services business to grow. So, keeping that in mind, you take a long term view with that in mind.
10:23 But when you want to forecast and when you want to do planning, you become more pragmatic,
10:29 and maybe do it for one quarter, two quarters, and then take it as it comes.
10:33 Right. Well, congrats on the deal bookings and the guidance for the second half, despite being
10:40 lowered much higher than what the street has for everybody else. All the best for that. And to you
10:46 and your team, wishing you a very happy festive season. Yeah, happy festive season to you as well.
10:51 Take care. Thank you. And viewers, thanks for tuning in.
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