Stock pulse is a format where we explore the most important questions to understand the company's performance.
About HCL Tech
HCL Tech is a leading global IT services company, ranked amongst the top five Indian IT services companies in terms of revenues. HCL Tech offers an integrated portfolio of services including software-led IT solutions, remote infrastructure management, engineering and R&D services, and BPO services.
Consolidated Revenue Mix:
Business Segment
| FY 2020 | FY 2021 | FY 2022 | FY 2023 | TTM | As a % of TTM revenues |
IT & Business Services | 50,742 | 53,401 | 61,742 | 74,015 | 76,581 | 72.8% |
Engineering and R&D services | 11,819 | 11,745 | 13,564 | 16,802 | 17,265 | 16.4% |
HCL Software | 8,115 | 10,243 | 10,370 | 10,639 | 11,299 | 10.7% |
Total | 70,676 | 75,389 | 85,676 | 1,01,456 | 1,05,145 | 100% |
(Source: Company data, Amt in Rs. Cr)
Segment EBIT Margins:
Engineering and R&D services (ER&D) are a high-margin business (18-22%) as against IT & business services (16-17%, FY21 margins were abnormal and do not show a true picture). Although it's seasonal, the HCL Software segment is known for its very high margins. HCL has successfully increased the revenue share from ER&D + Software business to 25-30% and profit share from them to 35-40%.
EBIT Margins | FY21 | FY22 | FY23 | TTM |
IT & Business Services | 20.0% | 17.9% | 16.6% | 17.1% |
Engineering and R&D services | 21.4% | 19.2% | 20.2% | 19.0% |
HCL Software | 28.3% | 24.4% | 25.1% | 24.6% |
Total | 21.4% | 18.9% | 18.2% | 18.4% |
Recent Acquisition: HCL Technologies recently acquired the German automotive engineering services company ASAP Group. This strategic acquisition bolsters HCLTech's global leadership in engineering services, particularly within the fast-growing European automotive engineering services sector. ASAP Group specializes in services aligned with key industry trends, such as e-mobility, autonomous driving, and connectivity.
Recent quarterly performance:
In Q3 FY '24, HCL Technologies reported strong performance with a 6% sequential and 4.3% YoY revenue growth in constant currency, the highest since Q3 2021. Services revenue grew 3.1% QoQ, and software revenue increased by 5% YoY, driven by subscription and support revenue growth. Operating margins improved to 19.8%, even after accounting for wage hikes. The company received numerous awards, demonstrating leadership in IT services.
What's happening to global IT spending?
In the current economic climate, businesses have scaled back investments in digital transformation due to reduced demand. Instead, they are focusing on cost-reduction initiatives. This shift negatively affects services like application development, infrastructure implementation, and consulting, as these require a change in business perspective and are now considered less of a priority amidst the current challenging economic conditions.
Over the past year, many enterprises have realized that they previously allocated excessive budgets to transformation projects. Now, they are actively streamlining their expenses. Consequently, IT companies are winning a majority of deals related to cost reduction and optimization, shifting away from traditional digital transformation initiatives.
Has anything changed since last quarter?
Management commentary regarding business sentiment toward discretionary spending remains the same as in the previous quarter. However green shoots of growth were visible in the engineering segment, for FY24 HCL expects to close at 5% to 5.5% YoY growth. Management iterated that the environment is not conducive to increasing margins at this point and thus is focused on gaining wallet share with vendor consolidation deals.