HCL Technologies projects weaker year ahead than FY24

India’s third-largest IT services company ended FY24 with 5.4% year-on-year (y-o-y) growth in revenue, higher than its peers in the top four, and in line with analyst expectations. However, the company projected a weaker ongoing financial year (FY25), with a guidance of 3-5% constant currency revenue growth and 18-19% operating margins.

C. Vijayakumar, the company’s managing director and chief executive, said that the overall macroeconomic environment may impact the company’s growth potential in FY25. “The macro situation will be similar to what we saw in FY24. Our revenue growth guidance factors this. We have outperformed our peers in services delivery in both FY23 and FY24, and we’re confident of delivering good performance in any economic scenario,” he said.

At the same time, HCL Technologies saw a drop in margins in the March quarter due to a drop in high-margin deals and a seasonal decline in business from its software vertical, and also reported a flat full-year (FY24) operating margin of 18.2% compared to FY23. In the March quarter, its margin dropped by a significant 2.2 percentage points sequentially to 17.6%, which wiped out any potential for growth in FY24.

Prateek Aggarwal, chief financial officer of HCL Technologies, attributed the weakness in margin to seasonality. “Our software businesses peaked in the December quarter, which boosted our margin to nearly 20%. Going forward, our margin guidance remains 18-19% for FY25,” Aggarwal said.

Growth in operating margin is a key indicator of a service provider winning large deals with strong profitability. A decline in this metric typically indicates a weak overall market, where there are fewer discretionary deals from clients across verticals.

HCL’s consolidated revenue for the full year was $13.27 billion, up from $12.59 billion in FY23. Consolidated net profit for FY24 rose 3.2% y-o-y to $1.9 billion. Both the figures were in line with Bloomberg’s estimates.

With this, HCL outperformed its peers in revenue growth—TCS revenue grew at 4.1% and Infosys, 1.9%. Wipro reported a 3.8% revenue decline for FY24. That said, HCL’s 3.2% growth in net profit lagged behind TCS and Infosys in FY24, with the latter two reporting 7.7% and 6.2% profit growth, respectively.

Vijayakumar said that while the company added three $100 million-plus clients through FY24, there is no issue with execution of deals—a factor that many of HCL’s peers have flagged through the year due to cautious client approaches.

“This increase in large clients contributes to a full-year services revenue growth for us, and we’ve recognized revenue from these large clients through the past 12 months. These deals include hybrid cloud transformation and digital transformation,” he said.

Analysts were largely pleased with HCL’s overall performance. “The company has a reasonably strong overall deals pipeline, and given its overall execution and performance through the weak FY24, the immediate future looks promising enough in FY25,” said Biswajit Maity, principal analyst at Gartner. “However, seasonality will remain a concern, and customers are delaying deal signings and executions due to cost-saving exercises globally. These issues will need to be factored in.”

On a quarterly basis, net profit fell 8% sequentially to $480 million in the March quarter, while revenue remained mostly flat with a 0.4% sequential rise to $3.43 billion. HCL’s profit for the March quarter fell below Bloomberg analysts’ estimate of $494 million.

For the June quarter, Vijayakumar expressed caution on a potential hit to the company’s earnings, citing the company’s switch to a “global delivery model”, which refers to offshoring of a range of businesses to third-party vendors around the world. Such a model improves costs but may impact revenue growth.

Meanwhile, HCL was the only firm among the top four in Indian IT services to report a net headcount increase of 0.7%, with TCS, Infosys and Wipro reporting 2.2%, 7.6% and 9.5% headcount declines, respectively.

HCL earned $8.59 billion in revenue from the Americas, up 6.4% from FY23 for the region. Its largest vertical, financial services, also registered a 12.7% revenue increase to $2.93 billion, seeing the company outperform in a region and an industry where most of its peers have faltered.

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Published: 26 Apr 2024, 08:56 PM IST