HCL Tech Q1FY18 Concall Summary


HCL’s overall performance in Q1 FY18

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  • Fifth consecutive quarter of industry-leading performance
  • HCL Tech is emerging as one of the most reliable performers in the IT sector Q-o-Q
  • HCL’s success is due to their consistent focus driven by our Mode-1-2-3 strategy
  • Phil Fersht – the CEO of a leading industry analyst firm Horses for Sources described HCL’s reputation as “consisted of a rolled the sleeves up attitude' and a no-nonsense approach to business, determined, humbled, focused, quite but aggressive”

Prestigious company level recognitions

  • Ranked the “Number One IT Services Company” and “Sixth Overall” in LinkedIn “India's Most Sought After Companies List”
  • Included in the “Most Honoured Companies List” for Asia by Institutional Investors
  • Emerged as “No. 2 in Nikkei Asia's 300 Companies List”, which is a compilation of high-performing listed companies in Asia
  • HCL was no. 1 among the India listed companies in the Nikkei Asia’s 300 list

Financial Highlights

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  • In dollar terms HCL did 3.7% quarter-on-quarter and 11.4% on year-on-year at an EBIT of 20.1%, and from a constant currency point of view it is 2.6% and about 12% for the year-on-year
  • EBIT has enhanced, in-spite of currency headwinds due to accelerated execution of integration of acquired entities and assimilation of the IP investments made in the last few quarters
  • HCL bought home 13 transformational deals which represented a well-balanced mix across service lines, industry verticals and geographies
  • HCL delivered industry-leading revenue per employee of $63.5K, which is a 6% increase YoY
  • HCL had a pretty healthy mix of contribution from organic and inorganic
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Net income  

  • HCL had the benefit of tax reversal of $45.5 million in Q1FY18 which is not available this quarter
  • Net income has come down from $349.9 million to $336.7 million
  • From a Y-o-Y basis, the net income has grown 10.3% against revenue growth in dollar terms of 11.4%
  • Acquisition of the company Urban Fulfilment Services (UFA), whose revenue for calendar year 2016 was $48million, is getting delayed

Profit margins

  • There is an expansion of 10 bps from 20% to 20.1% in EBIT margin
  • There was a negative impact of 40 bps primarily on account of rupee depreciation, without which this would have been 50 bps increase in margins this quarter
  • Factors contributing to increase in EBIT margin are
    • Superior Execution
    • SG&A benefit due to acquisition
    • Increase of utilization
  • Net income to operating cash flows has been at 104% while EBITDA to free cash flow has been healthy at 76%
  • HCL bought back Rs. 3,500 crores in July and declared a dividend of Rs.2 per share

Days sales outstanding (DSO)

  •  DSO continues to be 82 days, both billed and unbilled put together, same level as it was last quarter.

Hedge book

  • Hedge book is at $13.51 million, primarily consisting of cash flow hedges and to some extent balance sheet hedges
  • Hedge gain of $16.5 million recorded this quarter which is reflected below the EBIT line
  • Last year HCL had several mega deals and a large contribution from one of the acquisitions

Margin guidance

  • HCL’s margin guidance is at 65.5 and they are probably at upper end of the range

Share count

  •  Share count has gone up by 1%
  • Buy back was about 2.5%

Revenue from new clients

  • Percentage of revenue of new client compared to existing client is 2.4% and this is the lowest number HCL has had at the beginning of year
  • New client does not show reset every year beginning and is continued on LTM basis
  • In terms of revenue translation new accounts are taking a little bit more time while the quarter two materializes into revenues

IP Amortization

  • HCL does amortization of IP on basis of expected revenue
  • A significant portion of that gets reduced from the revenues directly and other portion is getting shown in the line of amortization
  • In Q1FY18 , close to 12 million got amortized against the revenue, total is 17 million which got amortized and the balance got written-off in the line of amortization

Employee cost

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  • HCL has added 1.6% Employee in IMS QoQ so that costhas gone up only 0.9%
  • Overall HCL had a net addition of 1800 people and a lot of it was offshore
  • HCL had productivity gain (revenue per employee) of 6% on LTM basis
  • Multiple factors like the revenue profile and managed services contracts, fixed price contracts and some of the high-end offerings are contributing to this productivity gain

US protectionism

  • In US market there is slowdown in decision making
  • Traditional headwinds around smaller deal sizes due to automation, new consumption models are part of the slower growth
  • HCL has to factor in some softness in Infrastructure business

Performance in European market

  • Europe weakness has been contributed by two factors
    • One was Financial Services customer whose BPO scope of work was insourced due to regulatory reasons
    • The se  cond is the large Infrastructure deal, which entered in to the second year, there is a structural reduction in revenues
  • HCL has done their bit to make sure our costs are also reducing in line with the committed productivity benefits that HCL is passing on
  • Apart from these two reasons, Europe did very well in terms of generating growth

Industry Sector perspective

  • Four verticals - Financial Services, Manufacturing, Life Sciences and Retail-CPG delivered sequential growth greater than 3%

Financial Services Business

Banking and Insurance

  • HCL relatively had strong growth sequentially in US Banking & Retail
  • In last couple of quarters,HCL had significant new account wins in North America and Europe, especially in the Fortune500 set of financial firms, both Banking and Insurance sector
  • Reason for this win is repositioning of HCL’s offerings which are more engineering-oriented, more technology at core
  • Financial sector is hugely impacted by millennial and buying behaviour is intended towards need for mobile and always connected customers


  • SAP customers now recognize the fact that there is fair amount of bolt-on work for which HCL’s Mode-2 services can be used
  • HCL is doing additional work on top of SAP largely on Supply Chain side, partially also on the way merchandizing was being done and trade promotion in few areas

Retail and digital marketing

  • Driver for change of projects is the integration and onlineprocess in almost individually at each Retail shops
  • For the past three years a lot of the Digital transformation focus was in the frontend transformation on customer facing platforms
  • Now the focus has been around modernization of the back end, using APIsand micro services technologies

Client-partner program

  • Client-partner program “One-HCL” is driving increased revenues from HCL’s Top 150 accounts
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Mode 1 

  •  A large percentage of HCL’s large deal wins comes fromMode-1 Services - focused on gaining market share in HCL’s existing offerings
  • DryICE platform has become an essential and highly differentiating part of HCL’s solution in both Infrastructure and Application Services
  • DryICE focuses on automation, Artificial Intelligence, etc., to help customers reduce cost
  • HCL renewed and enhanced all of the deals that came up for renewal in the past quarter

Infrastructure Management Services

Achievements in Infrastructure Services

  •  HCL’s 360 Degree SDI solution called “Velocity” achieved VMware Validated Design Product Zero Certification globally, and this is a first in HCL’s peer set
  • “Number One IoT” in Everest Peak Matrix for IT Infra Automation in 2017
  • Recognised “Star Performer of the Year” for cloud native and Infrastructure Services by Everest
  • Gartner sighted HCL as a leader in “Gartner Magic Quadrant” for data centre outsourcing and Infrastructure, Utility Services in North America

Margins in IMS

  • IMS margins have improved significantly quarter-on-quarter, about 130 basis points
  • IMS is a very large component of managed services or fixed price kind of revenue construct

Delays in decision making by clients around IMS

  • Some significant component of infrastructure deals comefrom a solution perspective with cloud or little bit of security
  • There is no change in solution or new solution that is causing delay
  • Delay is because clients are taking a very deep look at what they are trying to do from a large-scale outsourcing perspective

Future scope in Infrastructure services

  • IMS is a sub-10% growth business for HCL Tech which is clearly a growth driver
  • IMS pipeline is more or less same and deal sizes are smaller, so the number of deals could be slightly higher
  • In the near-term there is little bit of sluggishness, but the long-term trend is still significantly underpenetrated market segment
  • Infrastructure Services from a global delivery model and India Heritage Provider addressable opportunity perspective, the penetration is in single-digit
  • HCL is very strongly focused in US, UK, Nordics,Australia and it will venture in several other markets where HCL’s presence is small
  • HCL is expecting that the current couple of quarters or may be this year could be an aberration due to US protectionism

Engineering services

  • HCL’s focus was on for the acquired entities – Butler and Geometric, portfolio rationalization initiativesto drive better margins and synergies
  • Butler and Geometric acquisitions reinforced HCL’s Engineering Services position in Aero and Defence Manufacturing and PLM respectively
  • Engineering services had traditional organic growth, some of it could have been subdued in the last quarter because of the ramp downs in the previous large deals
  • HCL’s strategy has been to add more Mode-1 services toEngineering Services in terms of acquisition, so the add different service lines like PLM adds strength into verticals like automotive, industrial and heavy engineering

Technology disruption in engineering services

  • Technology disruption is more positive for HCL, because they end up in participating in making those technologies so that they can be applied in rest of the IT
  • Some services in online an ISP space have marked to new services, but in traditional space which are more hardware engineering and mechanical engineering oriented, that disruption is not as high as in the rest of the IT services

Application Services

  •  At Sapphire 2017, HCL launched SAP S/4HANA solutions tailored specifically for the aerospace and defence industry
  • HCL's “Base90 Aerospace Company Solution” solution has been validated by SAP's A&D business unit
  • HCL focusses more on the margin as a whole of the business
  • Also IPDs are only positively impacting the margins

Mode 2

  • Mode 2 services consists of Digital and Analytics, IoT Works, Cloud Native Services and Cyber Security
  • Digital we won several deals, some notable engagements are in the “Investor Release”
  • HCL was featured in IDC's report on Design Thinking in European Digital transformation
  • HCL’s collaborative and ecosystem based approach to Digitalization was recognized as a strong differentiator


  •  Positioned in the “Winner Circle” and “Number 1 IOP” in HFS Blueprint Guide on industry 4.0 Services
  • HCL signing a deal to operationalize and run a dedicated remote operations centre for a global 2000 European consumer electronics major

Cloud Native Services

  • HCL achieved Amazon Web Services Storage Competency status
  • This status recognizes that HCL provides design implementation and managed services to help successfully clients achieve their storage goals on the AWS platform

 Cloud SaaS

  • HCL PowerObjects was placed in the “Winner Circle” of HFS' FIRST BLUEPRINT GUIDE on MS dynamics
  • HCL PowerObjects also won “2017 Microsoft Worldwide Partner of the Year Award” for Dynamics365, Consulting and System Integration Services

 Pharma solutions

  •  HCL launched Next Generation Research platform, which will reimagine the new drug discovery process in the pharma industry

 Cyber Security

  • HCL launched GDPR services to enable organizations to comply with EU GDPR regulations

 Mode 3

  • Under Mode-3 Products & Platform business HCL focusseson both in-house IPs and strategic IP partnerships
  • This quarter HCL filed 35 patents in next generation Engineering, Products & Platform in various domains like IoT, Machine Learning, Analytics, Automobile Engineering, Wireless Devices and machine to machine communications
  • Announced new solutions like “DryICE Cognitive Orchestrated Process Autonomics” (COPA Platform)
  • This solution extends HCL’s capacity to provide an end-to-end AI powered automation work flow for the business processes
  • Future investments on IP strategy depend upon opportunities in Mode 2 and Mode 3 services
  • Margins due to IP strategy are better than the company level margins seen so far
  • HCL intends, over a period of next couple of years to build a good portfolio across multiple technology providers

 IP partnership with IBM

  • HCL invested nearly $780 million (10% of HCL revenue) in IBM partnership and expect $200 million value from the deal
  • Partnership help Built HCL's expertise through solutions, innovation labs and Centers of Excellence across multiple product segments such as DevOps, Automation, Legacy Modernization and Data Transformation solutions
  • Partnership enabled expansion in marketing automation space
  • HCL has invested $140 million in this extended partnership
  • HCL has a revenue share relationship with IBM from the existing install base and the new product sales
  • HCL also has the permission to renovate these products based on the IP license
  • HCL had an annual impact of $35-30 million due to this deal
  • The very first investment that HCL did as part of IBM partnership has finished four quarters and HCL is above plan on that program

Go-To-Market strategy for Mode 3

  • HCL intends to launch several products on top of some of the IPs acquired
  • HCL has an independent go-to-market team within Mode-3 organizations to reach out to clients and build a HCL generated pipeline and sales for the Mode-3 services
  • HCL is also looking forward to in-house development of IPs which is really an offshoot of their DryICE proposition


  • 12 months back three to four quarters were muted where the company had its share of in-sourcing
  • They are happening now more on the margin rather than impacting the revenue. So, growth is kind of compensating for that at this point of time


 Training HCLites

  • Focus remains on training HCLites on Next Gen Technologies, “Skill Lease Academy”
  • HCL has built a Proprietary Automated Assessment Platform for next gen full stack technology skills to ensure rapid and upscale, employee upskilling and employee acquisition processes

Women advancement initiatives

  • Hired more than 10 senior women leaders, including our New Risk and Compliance Lead and the top leader for Digital workplace SI business


  • Under the “Power of One program”, 2400 HCL employees volunteered in community activities, contributing 14000 hours, reaching out to 32,000 beneficiaries
  • HCL is working very closely with “Women Connect Groups” in Global Development or Delivery Centers” in North Carolina
  • In Frisco, Texas HCL was recognized as a “Trustee Partner” in the “Frisco Chamber of Commerce”
  • The centre is very powerful showcase for positioning and convincing customers on HCL’s onshore presence and solution that need onshore collaboration

 Future outlook

  • HCL is putting lot of leadership and attention in bandwidth to be very successful in Mode-2 and Mode-3 services
  • HCL is also trying to continue to strengthen their sweet spot in Mode-1 services
  • The company believes that it is best positioned in the industry to really emerge as the next generation services firm