HCLTech beats estimates, logs fastest sequential revenue growth in three years

HCL Technologies Ltd, India's third-largest software exporter, reported better-than-expected revenue and profit growth during the three months ended September.

HCLTech's revenue for the three months ended September grew 2.4% sequentially,  and 6.8% year-on-year to $3.45 billion. Much of its sequential growth came from clients based in Europe, which contributed almost half, or $39 million of the company’s $81 million incremental revenue growth.

With this, the Noida-based IT company has added $384 million in incremental revenues in the first half of the fiscal year, up 5.98% from the same period last year.

The company’s net profit was another bright spot in its report card. It reported $506 million in net profit, up 2% from the preceding quarter.

A Bloomberg survey of analysts had expected the company to report $3.4 billion in revenue and $484 million in net profit.

However, this growth came at a cost. HCLTech reduced headcount for the second consecutive quarter, eliminating 780 employees, which the management partly attributed to a pyramid shift caused because of a higher requirement of specialisations. This is in addition to the 8,080 employees it retrenched in the preceding quarter. At the end of 30 September, the company had 218,621 employees.

In contrast, peers Tata Consultancy Services Ltd and Accenture Plc have been adding employees over the past two quarters. Employee addition is often a leading indicator of growth and demand at software services companies. The IT services sector is primarily a people-led sector as employees make up the biggest chunk of their cost pie.

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Cautiously optimistic 

HCLTech’s leadership highlighted good demand leading to the company’s growth, but was cautious of the future.

“We see demand, 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, because in 2022 in November and December is when we heard the signalling about the weakness on the demand environment,” said C. Vijayakumar, chief executive officer of HCLTech, at a post-earnings press conference on Monday.

The company raised the lower end of its FY25 revenue growth guidance to a range of 3.5%-5%, from 3%-5% earlier, indicating it expects a demand recovery in the months to come.

“This revision is only on the lower end which means that even if there is a slight demand improvement, it is not all that great,” said a Mumbai-based analyst on the condition of anonymity.

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HCLTech’s profitability shot up, too. Its operating margin rose by 150 basis points (bps) to 18.6%, which is its highest since September 2021. 

Much of the increase came on the back of its software products business, whose profitability jumped 510 bps on a sequential basis, which the HCLTech leadership attributed to client renewals, focus on emerging markets and innovation of existing software products. One basis point is one-hundredth of a percentage.

HCLTech had bought eight software products from IBM in December 2018 for $1.8 billion (the acquisition was completed in July 2019). This was the largest purchase by an information technology (IT) services company at the time, and marked a rare foray by any Indian service provider into the highly competitive software products arena. The idea then was to bump up the company’s operating margins.

“The software products business did well this time around and that contributed to the margins growing,” said the Mumbai-based analyst quoted earlier.

Manufacturing to the rescue

Last week, Tata Consultancy Services Ltd, India's largest software services company, reported a 2.2% sequential rise in revenue in the September quarter at $7.67 billion. Its net profit of $1.43 billion for the quarter was 1.6% lower sequentially, marking the first time in five years that the company ended the September quarter with a sequential decline in net profit.

TCS’s operating margins took a hit too, falling for the first time since September 2019. The company’s profitability narrowed to 24.1%, down 60 basis points sequentially.

TCS chief executive K. Krithivasan said the demand environment was cautious. However, he said that an easing interest rate environment could lead to more investments from clients.

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Even the commentary on generative artificial intelligence (GenAI) was subdued. HCLTech's Vijayakumar, like TCS's Krithivasan, did not disclose the revenue from Gen AI, which has garnered much attention due its content generating capabilities.

For HCLTech, its IT and business services segment remains the cash cow, fetching $2.57 billion or about three-fourths of its $3.4 billion revenue in the three months ended September 2024.

In terms of business verticals, HCLTech earns a fifth of its revenue from financial service providers but most of its growth came from clients in the manufacturing business, which contributed almost a fourth of its incremental revenue for the quarter. 

The company got $672 million in business from manufacturers in the quarter ended September 2024, which is a 3% growth in business from the preceding quarter.