During the October-December quarter earnings call of HCLTech, CFO Prateek Aggarwal termed the company’s quarterly performance as a “sixer”. The reason being that the country’s third largest IT firm’s revenue grew at 6% and net profit by 13.5% sequentially, which was in stark contrast to other domestic IT services firms who either grew in low single-digit or witnessed a decline.
HCLTech was in the same league as its peers during the first and the second quarter. Analysts say a combination of factors helped the firm to perform excellently in a quarter which is seen as weak for the industry.
The timely ramp up of the Verizon deal aided its US telecom vertical in Q3. The telecom vertical saw a sequential growth of 25.9% in the quarter. In August last year, HCLTech signed a mega deal with Verizon, with an estimated new total contract value of $ 2.1 billion spanning over a period of six years. The company was expecting the deal to start giving revenue from November 2023.
The largest boost to growth came from the software business that grew at 32% quarter on quarter (QoQ). C Vijayakumar, CEO, HCLTech, termed it as outstanding performance. He added, “This is attributed to an impressive improvement in our support and subscription-related revenue, as we convert perpetual-to-term licences and reduce our dependence on perpetual revenue”.
Vijayakumar added, “Our ARR (annual recurring revenue) continues to grow, and it is at $1.06 billion, a growth of 2.9% year-on-year in constant currency. The software business delivered a strong profitability, with the operating margins coming in at 32.9%”. Another factor which helped was engineering research and development (ER&D) business that grew at 8.7% QoQ and 2.5% QoQ on organic basis.
Commenting on ER&D business, analysts at Kotak, noted, “Revenue growth was driven by secular strength in automotive vertical, and recent large deal wins. The outlook in this business is improving and is likely to continue healthy growth momentum. We believe ASAP acquisition would enable the company to increasingly participate in technology transition underway in automotive vertical and also benefit from cross-sell of services to existing clients”.
HCLTech also tightened its FY24 guidance for its revenue growth and expects it to be in the range of 5% to 5.5%. Its earlier guidance was in between 5% – 6%. Analysts at Nomura said, “The ask rate to achieve the FY24 guidance is 0.3%-2.1% QoQ at the overall company level and 1.6%-3.5% QoQ at services level”.
Despite taking into account the impact of wage hikes and furloughs, HCLTech also managed to improve its operating margins to 19.8%, a 126 basis points improvement sequentially. In contrast, Infosys and Wipro saw their margins going down by 70 bps and 10 bps, respectively in Q3.