At India’s third-largest IT services company, June quarter revenue fell 1.9% sequentially to $3.36 billion, in line with expectations of analysts polled by Bloomberg. The Noida-headquartered company attributed the muted performance to weakness in its automotive business.
“The decline in ER&D (engineering, research and development) is due to an unexpected softness in automotive clients, which comes against the projections,” said C. Vijayakumar, chief executive and managing director. “We expect to recover here in the next quarter. On overall terms, while we did see some signs of the slowdown bottoming out, that has not panned out. As a result, we don’t expect to see any significant recovery, which is why we’re retaining the revenue and margin guidances for this fiscal.”
The weak projection
At the end of FY24 itself, HCL Tech had projected weak growth for the coming year, citing a weak macroeconomic environment. On Friday, its executives maintained their view of annual constant currency revenue growth of 3-5% for FY25. Constant currency does not take currency fluctuations into account.
For comparison, TCS’s revenue grew 1.9% sequentially to $7.5 billion, with chief executive K. Krithivasan suggesting its FY25 growth could be better than the last fiscal. Shares of TCS jumped 6.68% on Friday, while the BSE IT index rose 4.32% to 39828.91 points. Shares of HCL Tech closed 3.2% higher, before the earnings were announced.
Operating margin fell by 50 basis points (bps) to 17.1%, missing the company’s guidance of 18-19% for the year. One basis point is one-hundredth of a percentage.
The mega deal
For HCL Technologies, a one-off mega deal contributed significantly to its revenue from telecommunications, the only vertical that offered meaningful growth. In August, HCL had signed a $2.1-billion managed network services deal with Verizon Business. Thanks to this deal, revenue from the telecom vertical rose to $410 million, adding $167 million in incremental revenue from last year.
In a near parallel, TCS too received a big boost from a $1.83-billion network project that it is executing for Bharat Sanchar Nigam Limited (BSNL).
A senior equity analyst at a Mumbai-based brokerage firm said the company’s performance was “better than expectations.”
“There is a clear environment of weakness in the industry, and recovery has not panned out as yet. On overall terms, HCL’s business has strong foundations, and we saw its resilience clearly in the last fiscal. We believe that the company should be able to meet the upper end of its annual revenue growth guidance this fiscal,” the analyst said.
Sanjeev Hota, head of research at brokerage firm Sharekhan by BNP Paribas, said the firm will maintain its buy rating on the HCL Technologies stock, assessing the quarterly performance as “decent”.
Cutting staff strength
Overall, HCL Tech reduced staff by 8,080, attributing it largely to the sale of a joint venture with US-based financial services firm State Street. Ramachandran Sundararajan, chief people officer of HCL Technologies, said the company still expects to meet its target of hiring 10,000 freshers, a guidance given out last quarter.
HCL Technologies reported $496 million net profit in the June quarter, up 3.3% sequentially, higher than $461 million projected in a Bloomberg poll.
While the software products business is historically its primary margin booster, operating margin for this vertical declined 40 bps sequentially to end at 20.5% for the June quarter.
Mint reported last month that barring FY23, profitability of the software products unit, rebranded HCLSoftware in June 2022, has been falling each year since the IBM transaction. Its target operating margin of 30% has been met only once, in FY20.
A weak start to the financial year, thus, puts a question mark on growth for the remainder of the year for the company, which outgrew its top four Indian IT services peers in revenue last year.
Silence on generative AI
HCL also did not spell out a generative artificial intelligence (Gen AI) pipeline, unlike peer TCS, which announced $1.5 billion as AI/Gen AI pipeline as of June 2024. Vijayakumar said the company was working on more than 200 proofs of concept, and would disclose the project pipeline and prospective revenues from the business at a later date.
For HCL, IT and Business Services remains the cash cow, fetching $2.51 billion or about three-fourths of its $3.43 billion revenue in the June quarter.
In terms of geographies, it earned 66% of its revenue from the Americas, with business growing for the second consecutive quarter from a region that has been marred by uncertain client spending for IT services companies.
In terms of verticals, business from its top three revenue drivers, including financial services, manufacturing, and Life Sciences & Healthcare declined on a sequential basis. For financial services, which brought 21% or $706 million of revenue this quarter, the management expects no growth in the coming quarter either.
However, Vijayakumar sounded optimistic about the telecom sector.
“This is really a unique situation where we had signed a very large deal, and it is safe to say that a significant part of our growth in the telecom vertical came from it. However, we don’t expect it to be a trend, even though we see opportunities there,” said Vijayakumar.
HCL’s telecom business grew 69% on constant currency terms on a yearly basis, generating $410 million on a yearly basis even though this growth was not pronounced in sequential terms.