The steady deal flow signals a gradual revival in demand for HCL tech

HCL Technologies’ (HCL Tech) December quarter performance beat analysts’ expectations in terms of improvement in rupee net profit and margins, though dollar revenue growth was slightly below estimates. The country’s third-largest software exporter raised the lower end of its FY25 revenue growth guidance to 4.5% from 3.5% earlier, suggesting it is on track to report better top-line growth.

Revenue rose 2.4% sequentially to $3,532.9 million, while the growth was better than the 1.7% decline reported by Tata Consultancy Services (TCS), still lagging behind analysts’ average estimate of 2.9% growth. Excluding currency fluctuations, HCLTech’s revenue rose 3.8% compared to a flat performance by TCS. Looking at trailing 12 months (TTM) revenue, HCLTech has posted higher growth than TCS for four consecutive quarters. In the latest December quarter, it reported 5.3% TTM growth while TCS reported 4% growth. Given HCLTech’s revenue guidance range of 4.5%-5% growth for FY25, it is likely to retain the lead for the current fiscal.

In rupee terms too, HCLTech outperformed TCS. While the latter’s revenue fell 0.5% sequentially to Rs 63,973 crore, HCLTech’s top line rose 3.6% to Rs 29,890 crore. Net profit rose 8.4% to Rs 4,591 crore, compared to Rs 4,591 crore for TCS. 12,380 crore was a 4% growth.

Like TCS, HCLTech reported increased employee attrition amid the growing influence of global competence centers (GCCs) set up by multinational clients in India. For HCLTech, attrition increased to 13% from 12.3% in the previous quarter. Headcount improved sequentially from 2,134 to 2,20,755 after declining in the previous two quarters. However, on a year-over-year basis, it fell for the third consecutive quarter, this time by 4,001. Given the expected gradual recovery in discretionary demand in the coming quarters, increased attrition rates may result in increased employee retention costs, thereby impacting profitability.

HCLTech’s operating margin (EBIT margin) rose 90 basis points sequentially to 19.5% for the December quarter, marking the second consecutive quarter of expansion. For TCS, the margin increased by 40 basis points to 24.5%.

Total contract value (TCV) of large deals remained above $2,000 million for the second consecutive quarter and was up, although it was up from $2,218 million in the previous quarter to $2,095 million due to seasonal weakness in the third quarter due to furloughs and holidays. $1,927 was reported in the year-ago quarter.

The company reported its highest ever cash balance of Rs 27,707 crore due to higher cash conversion compared to net profit and improved return on capital employed. This will come in handy if the company chooses an inorganic route to add capabilities to new technologies to stay ahead of the competition.