HCL Technologies operating margin will stay 19-21% in FY22: Prateek Aggarwal, CFO

Prateek Aggarwal, Chief Financial Officer, HCL Technologies, talks about constant currency growth, business outlook, operating margin, order book, growth in different verticals and international markets among others during an exclusive interview with Swati Khandelwal, Zee Business. Edited Excerpts:

Q: Constant Currency growth was at 7.6%, the highest in the last 12 years. What were the key reasons for this and going forward, what is your outlook?

A: 7.6% Quarter-on-Quarter (QoQ) is very rare and it is the highest amongst the peers. You have rightly pointed that a day like this has been seen after 12 hours and at that time, our company was one-fourth as compared to today. So, it came after a long interval of 12 years. Growth is the main focus and a good demand is coming in the market since the last one year and we are capitalising on it and continue to do so in the future as well. There are 2-3 views on how this number came:

(i) The deal wins of the last one year, the deals that we announced in form of TCV (Total Contract Value) is coming quite good for the last four quarters. It took a while to ramp up but if you look at the last two quarters, the growth has been very good on services.

(ii) In this quarter P&P, seasonality is helping us. P&P grew 25%, which is quite a record kind of growth. The second one is ERS or ER&D where we have seen a growth of 8.50%. ITBS grew at 4.7%.

So, all these are very strong numbers and that is how the growth has come. We have been hiring a lot of people who have become available and we started billing. So, all that has helped.

Q: What is your outlook for the future?

A: Services business has a different attitude in the sense it is a sequential growth kind of business. In the services business, we will continue to see that growth will continue. There is a seasonality in the case of P&P and it is seasonally high this time. Generally, the December quarter is always at a peak and the March quarter is slightly low. So, there will be a decline in services, which is seasonally, and it was seen last year as well as a year before it. It is nothing new and that is expected, as it is a seasonality of the business. So, it will offset things, otherwise, I think it should be a decent growth even next quarter.

Q: In terms of operating margin, it was stable and came in at 19.1%. What helped to keep it stable and what level of margin would you sustain for the whole of FY23 as the hiring spree is at top gear along with wage inflation?

A: Our guidance ranges between 19% and 21% and we gave it at the beginning of the year. If it is seen in the last three quarters, the average is about 19.2% or something like that. It was 19.1% even in this quarter. So, we are running at that kind of level. In the next quarter, we will have to see what it is but at the total level for the year we will be within that guided range that we have said.

Q: We saw an order book of $2.13 billion. From which verticals, you have the highest amount of TCVs and what's the deal pipeline ahead for the next 2 quarters?

A: Deal pipeline continues to be very good. Since the last four quarters, we have shown very good year-on-year growth. In this quarter, we signed deals worth $2.135 billion. It can be divided into three parts:

(i) Eight large deals in the services business. A large deal win means more than $25 million each. That contributed.

(ii) Smaller deals that are below $25 million individually but their quantity was quite high that contributed more than half of the $2.135 billion. So, that is the shorter duration and smaller deals and we are getting more quantity in this.

(iii) Even in the P&P business, we had eight large significant deals and its size lies at $2.50 million because P&P Is a different kind of business and we do not give a lot of deals worth $25 million.

Q: On deals, the company has a focus on small deals for higher growth ahead as on QoQ basis and 28 clients have been added in $1 million points of view, 17 were added in $5 million points of view while 10 in the total of $10 million and above bracket. So, the company will have a focus on small deals for higher growth and are you seeing such a kind of trend? 

A: That is the trend of the deals being given by the customers nowadays. In our pipeline, we have a lot of deals worth $100 million to $300 million. Those billion-dollar deals aren’t that much but the digital deals or rate deals or deals that are provided at the tail-end are announced only when we get firm orders. When we sign an MSA, we do not announce it because quantity is yet to come on it. When we get the SOW, you can say the purchase order, that is when we announce it. Typically, it can be of six months or a year or one-and-a-half-month, i.e., it is of short duration compared to five years or more than that.

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Q: There has been an all-around double-digit growth across verticals on a YoY basis. Lifescience & Healthcare grew by 21.3% and Tech & Services grew by 18.1%. Do you expect Lifescience & Healthcare vertical to maintain the same run-rate going ahead or is Tech & Services are expected to grow faster?  

A: Both of these segments or verticals are such, for instance, there has been COVID for the last two years, so, lifescience and healthcare, have themselves seen growth and they need more and more help on the IT side. The second is technology because everybody is locked at home, practically speaking, technology usage has increased watching from home and we have clients who need more and more IT help and support and we are a part of Go to the Market because we help them make their products available to their customers faster and that is where we are growing.

Q: Market-wise, America and the Rest of the World showed great resilience and performed well. Do you expect the same growth level to continue in these markets or there are some specific markets wise?

A: America and the Americas, we call it including Canada and Latin America etc contribute 60-65% of our revenue, so, it is almost like two-thirds of our business is coming from that one geography. That is the geography which is doing well economically also and they are helping the rest of the world most of the technology companies are from there. Even lifesciences and healthcare are also spending a lot trying to get over the pandemic.

Q: Is there any specific about the Indian market in terms of deals even from the government side?

A: We do not focus a lot on the government side. Even after many years, we have decided not to keep that as a focus. Apart from that in India, we work a lot for global customers and that is our mainstay. India is a decent market, we see good growth here also.