HCL Technologies’ CEO, C Vijayakumar, expects a boost in demand for Engineering, Research, and Development (ER&D) services despite the uncertain spending outlook in the US. The publication of the minutes from the US Federal Open Market Committee (FOMC) meeting in January resulted in a surge in the National Stock Exchange’s technology index, leading to optimism about the US market for Indian outsourcing. However, Vijayakumar states that the commentary from Federal Reserve policymakers has had little concrete impact on HCLTech’s clients, as discretionary spending by most US companies remains cautious.
Despite the uncertainty, HCLTech, India’s third-largest software exporter, reported a 6.2% net profit growth in the December quarter, surpassing analysts’ expectations. Vijayakumar believes that HCLTech can continue to drive growth in the near term through deal conversions, a diversified R&D portfolio, and the rising demand for generative AI.
Vijayakumar comments that there has been some confidence in the demand environment, but it is too early to see an increase in discretionary spending. He emphasizes that there needs to be a closer examination of the clients’ situation and the impact on spending before any conclusions can be drawn. Thus, the environment remains similar to the previous quarter.
When asked about ER&D demand, Vijayakumar states that HCLTech serves a wide range of industries in the ER&D space, including technology companies, telecom service providers, industrial engineering, automotive, medical devices, and semiconductor companies. In recent quarters, they have seen strong growth in the ER&D business, and this momentum is expected to continue in the March quarter.
Regarding margin expansion, Vijayakumar expects HCLTech to stay within the guided range of 18% to 19% in Q4. He explains that the high margins in the December quarter are due to it being a seasonally strong quarter for the software business. Thus, the spike in margins is typical for this period.
Vijayakumar highlights that HCLTech’s deal conversion rate has been consistent in recent quarters. He clarifies that they only count net new deal wins, excluding renewals and rate card and framework deals. This approach provides a clearer correlation between bookings and revenue.
When asked about the decline in the rest of the world business, Vijayakumar attributes it to the smaller portion of HCLTech’s overall business and some ramp-downs and furlough impact.
Regarding the demand for AI, Vijayakumar expects it to take two to three quarters before translating into meaningful revenue. HCLTech has already won 30 projects in generative AI in the last quarter, and while the initial projects were relatively small, they hold significant future potential. Vijayakumar suggests that as customers start implementing the first phase of AI projects, they will likely invest in data and multi-cloud solutions, as well as security measures.
In conclusion, Vijayakumar believes that despite the uncertain spending outlook, HCLTech can leverage its ER&D business, deal conversions, and rising demand for generative AI to drive growth in the near term. While there may be optimism in the market due to the Federal Reserve’s comments, there is still a need to closely examine the clients’ spending decisions. HCLTech remains focused on delivering value to its clients and positioning itself for future growth.
