HCL Tech in sweet spot despite recession fears

On Cloud Nine

- P&P business rises 30.5%

- It expects deal pipeline to be $2.5 bn per quarter

- IT firm reported a TCV of $2.3 bn which included 17 large deals in Q3

- With more cost takeout deals coming to the market

- Vendor consolidation also taking place

Bengaluru: Revival in product & platform (P&P) business, steady deal pipeline and falling employee attrition numbers are likely to put HCL Tech in a sound growth path in coming quarters despite macro-economic uncertainty.

In the third quarter ended December, the Noida-headquartered firm witnessed a strong revival in its P&P business by posting 30.5 per cent quarter-on-quarter rise in revenues. Similarly, the company expects its deal pipeline to be in the range of $2-2.5 billion per quarter. In Q3, the IT firm reported a total contract value (TCV) of $2.3 billion which included 17 large deals.

With more cost takeout deals coming to the market along with vendor consolidation happening, the company expects these two factors playing out in its favour in coming quarters.

“Vendor consolidation is one of the growth opportunities ahead. The company indicated that vendor consolidation opportunity could be around $115 billion spread over next two to three years,” ICICI Direct wrote in a note.

According to the company, it is incrementally seeing a trend of more cost optimisation deals. Hence, it expects future deal pipelines to be skewed towards more cost take out deals. Many IT firms including Tata Consultancy Services, Infosys, HCL Tech and Wipro are reporting bagging large deals in recent months as enterprises across the world are looking at cost savings through outsourcing majority of IT work to third party vendors.”

Apart from revenue, HCL Tech is also expected to witness increased operating margin in coming quarters.

Falling attrition, higher employee utilisation level and improving P&P business are seen as key factors driving the margin going ahead.

HCL Tech has already reported a fall in the attrition level in the third quarters. Its attrition touched 21.7 per cent, a fall of 2.10 per cent over the last quarter. The company sees it further falling in the fourth quarter.

Similarly, it has seen improvement in its employee utilisation levels. Improved utilisation level with less churn in headcount will support the margin profile.

“The company had guided that it will hire at thelower end of 30,000-35,000 freshers in FY23. It, however, has indicated that the fresher hiring during the year may be lower than it planned as supply side pressure is easing indicating moderate hiring in Q4FY23,” ICICI Direct said.

Meanwhile, revival in P&P business is likely to push the operating margin as the company receives high margin from this segment. Moreover, pricing environment for the company remains favourable as HCL Tech is able to get higher pricing on new deals.