Spends on tech are only going to increase: HCL Tech chief C Vijayakumar

In a Q&A, the company's CEO & MD dwells on the firm's growth momentum, supply challenges and demand

HCL Technologies revenue growth numbers for the third quarter of FY22 came in at the highest at 7.6 per cent on constant currency basis sequentially. However, supply side constraints and higher retention cost impacted the firm's margin performance as well as profits, which was one of the reasons for the firm's stock price to fall by almost 5 per cent in early trade. In an interview C Vijayakumar, CEO and MD, HCL Technologies talks with Shivani Shinde about growth momentum, supply challenges and demand. Edited excerpts

You said Q3 was one of the best quarters in 12 years. Could you take us through the growth drivers for this quarter and also elaborate more of the $2.1 billion TCVs that have been signed this quarter?

All three segments—IT services, engineering & R&D and products & platform—did extremely well in this quarter. ER&D services grew 8.3 per cent sequentially, and close to 20 per cent year on year, and products and platform being a seasonally strong quarter grew almost 25 per cent, quarter-on-quarter and IT services which is our largest segment also grew quite well 4 per cent-plus, so all three did very well. And the services business growth at 5.3 per cent came on the back of 5.2 per cent in the previous quarter. So that's a strong performance in terms of geographies and verticals. We had $2.1 billion in TCV booking, a 64 per cent increase YoY. This consists of eight large deals on the services side and eight significant deals on the product side. These deals are across segments like life sciences, financial services, manufacturing, telecom, all of that contributed to this deals. Demand environment is very strong and is driven by triggers like digitalization, digital engineering, cloud, these are big themes and these will play out for the next 2-3 years.

Q3 saw the products and platform (P&P) clock in 24 per cent growth. Do you think P&P will grow from here now or is this seasonally strong quarter for this segment?

Our P&P business is always going to see the peak in Q4, because a lot of them are perpetual licenses of software products. Maybe over a period of time, they will get converted into long-term licenses and subscriptions. We already have some part of these licenses, which are software subscriptions, where you will see some kind of stable and growing kind of annuity base. But for the foreseeable future we will continue to see this seasonality bit playing out.

Assuming P&P continues to be lumpy, do you see going ahead the other business can drive growth the way we have seen in this quarter?

I think the product & platform will have very modest growth. We have said zero to 1 per cent range, but services businesses are very strong, given the overall momentum and the pipeline we have and our conversation we have with clients, we are confident of a strong growth.

Attrition has impacted everyone but in case of HCL Tech the intensity seems to be a bit higher, margins are down but the supply-side constraints pulled down profit numbers too. Comment.

As far as margins are concerned, I think, the growth we have reported for Q3 and Q2 will take care of that. There is also a lot of ramp-up of fresh talent, we have a target of 22,000 people joining during the fiscal, we've already hired 15,000, and a significant number of them are still under training. They will get into billable roles soon. Also when there is attrition, there is the backfill cost. Given the current talent supply situation, those costs are way higher.

We do believe there are three levers for us to improve margins. One is, of course, the freshers who are on training, and will get into billing. We will continue to add more freshers, in fact, next year, we plan to double the fresher hiring. Second, is to focus on rate increases. If you look at our attrition in the team leads and the above segment, it's sub 13 per cent. We believe for higher skills, we are going to get much better rates from our clients, that is something we have initiated, and that's going to be a long term journey to get corrections. Third, as a volume speaker there is going to be some scale benefits. We already saw SGNA improve by 60 basis points on a QoQ basis. There is going to be some scale benefit of the investments that we made in some new geographies and the overall scaling of the business. With these three levers, we feel pretty confident.

You said it during the recent earnings call as well as your peers too that deal sizes are getting smaller. What does this mean for the business and will it be fair to assume that mega deals are off the table?

The pipeline has a good mix of large deals and mid-sized and small deals. We call out $25 million and above as large deals. So we have a good mix of mid-sized and a couple of 100 million plus deals as well in the last quarter. And I think it's a good mix, we do have large deals in the pipeline. And I think that's it's a balanced mix a little bit skewed towards smaller deals.

Even though the deals are smaller a lot depends on your ability to deliver consistently, quickly, there is a lot of premium that customers are putting on execution, because a lot of companies pick up business but because of the current challenges in talent situation, their ability to fulfill in a timely manner is something which is under stress. So I think, with a little more proactive planning, one would be able to address it. And that's really what we're doing.

How does the demand environment look for CY22, in terms of spends as well as deal sizes?

For our existing customers we are continuing to see a lot of incremental work on various areas where they want to modernize digital engineering, data monetization from transformation, all of that is coming in an incremental way. There is a lot of activity in the hype- scaler ecosystem. We have business units for Google, Microsoft, AWS, IBM, and many others. As a part of the go to market strategies with hyper-scalers, we have seen some good moments. There are a lot of clients who are migrating to different hyper-scalers to whom we become the services partner in migration and manage services for those clients. Going ahead for the year, I do think the spend is going to increase on tech. That's the broad theme, every industry is leveraging technology a lot more and that's going to augur well for service providers like us.