HCL Technologies Q2FY18 Concall Summary


Financial Highlights

HCL Tech Q2FY18 Financial Highlights.png


  • H1 revenues grew 11.7% and net income grew by 11.55 when compared to the same period last year
  • HCL saw industry-leading performance and nature of growth was broad-based
  • HCL also witnessed a very robustand broad-based booking performance in H1 of fiscal ’18 which is significantly higher than thesame period last year


  • Revenues grew by 2.3% in US dollar terms and 0.9% inconstant currency terms
  • Q2 EBIT stood at 19.7%
  • In Q2 revenues from India SI business declined by approximately $20 million due to completion ofimplementation of few large SI programs
  • Last quarter HCL also rolled out salary increases for employees as per our regular appraisal cycle which cost 50 basis points impact to our margins
  • Through the quarter, HCL won 15 transformational deals, it represented a well-balanced Mode-1, 2, 3 services mix
  • The deal wins were across US, UK, Germany and Australia among othercountries

Trends emerging from H1 performance

  • Growth is becoming more and more broad-based across all service linesand HCL has reduced dependence on any single service line
  • Each of the Mode 2 services, Digitaland Analytics, IoT Works, Cloud-Native Services, Cyber Security and GRC are bringing in significant number of deals
  • All these services have a robust pipeline and are establishing very strong thought leadership in their respective businesses
  • Over the last five quarters, HCL has perfected the art ofintegrating IP Partnerships
  • IP Partnerships and Acquisitions will continue to be a key element of HCL’s growth strategy across Mode 1, 2, 3 portfolio

Revenue guidance

  • HCL retains its FY’18 revenue guidance of 10.5% to 12.5% growth in constant currency
  • HCL translated the 10.5 to 12.5 on constant currency into the actual currency based on the 30th September rate
  • This would translate to 12.1% to 14.1% in US dollar terms based on September end rates
  • Revenue guidance builds in the impact of
  1. reductions in India business in H2
  2. the reductions in H2 revenues due to conversion of DXC Joint Venture arrangement into an IP partnership
  • HCL’s booking and pipeline is giving them confidence that they will be in lower end of the guided range
  • HCL is expecting that inorganic deals would not have any material contribution to the revenues before March 18

EBIT Guidance

  • HCL retains EBIT guidance at 19.5% to 20.5%
  • The EBIT guidance assumes dollar at Rs.65.5 and other currencies at the FY’17 average rate
  • HCL does not see any downside currency risk to margin because margin number is given without taking benefit of hedge gain

Financial Metrics

HCL Tech Q2FY18 Revenue Breakup.png
  • Excluding India, the growth was 3.4% in reported currency terms and 2% in constant currency terms
  • Revenue per employee is on a consistently increasing trajectory; it is now close to $64,500 and the non-linear momentum continues
  • Revenues have grown in the last 5-years at 12% CAGR
  • Headcount increase is 7%
  • EBIT has grown by 15% CAGR and net income has grown by 20% CAGR, much higher than the growth in the revenue

India business

  • India business declined by 20 million this quarter and if we expect same trend going forward, there will be impact of 70-75 million in this financial year
  • HCL has converted DXC partnership into an IP-based partnership which currently has revenue run rate of about $22 million
  • If it is assumed that revenue will become half there will be $22 million impact in the remaining two quarters.So both these put together will have $100 million impact this quarter

EBIT Margin

  • EBIT margin is at 19.7% and it is well within the guided range
  • This guidance of 19.5% to 20.5% was given with the exchange rate of US dollar to Indian rupees being 65.50 while the rest of the currencies is the average rate for last year

Wage hikes

  • This quarter also has the impact of wage hikes which is about 40 bps
  • HCL did gain because of currencies which had a positive benefit on the margins by 20 bps
  • The salary increase has been about 5% offshore and 1.5% onsite

Earnings per share

  • The earnings per share on quarterly and YoY basis has gone up by 10%
  • It is at Rs.62.70 the annualized earnings per share
  • HCL started investment program particularly VIP-led investment program more than one-year back
  • HCL’s return on capital employed has been very consistent; it would have only increased marginally at 23%, being one of the best in the industry
  • The dividend this quarter is at Rs.2 per share
  • HCL intends to maintain dividend pay-out ratio above 50% this year which was last year close to 50%


Layered hedging program

  • HCL’s layered hedging program continues to deliver results
  • HCL had exchange gain of 22.3 million in Q2FY18 which is below the EBIT line

Net income to operating cash flow

  • Net income conversion to operating cash flow last sequence is at 99.9%
  • EBITDA to free cash flow if we take out IP deals - inorganic is at 68% which is also pretty good

Working Capital Management

  • HCL continues to be the best in the industry in terms of working capital management with net current assets as a percentage of revenue is at 10.6%
  • DSO which was at 63-days is marginally up at 64-days this quarter


Amortization comprises of:

  1. IP-led deals
  2. Non-Organic acquisition like Geometric
  3. Customer relationships
  4. Quarter wise amortization
  5. Q1 – $18 million
  6. In Q3 it is expected to go up to $24-25 million
  • HCL’s EBIT guidance is after taking into account the level of amortization HCL will be doing

Mode 1 Services

Engineering services and BPO

  • Engineering Services grew 4.4% QoQ in constant currency supported by growth in existing clients and IP partnerships
  • The IP partnerships has not only given a growth momentum for Mode-3 products and platforms offerings, but is also creating new opportunities for a traditional Engineering and R&D Services
  • BPO Services grew at 2.9% QoQ on constant currency
  • BPO market is undergoing repositioning as traditional business process engagements is giving way to Digital-led initiatives embedded with (RPA) Robotic Process Automation solutions
  • Both Infrastructure and Applications Services together had approximately 20 million revenue decline from India projects

Infrastructure services

  • Infrastructure Services declined by 0.2% QoQ
  • If we look at constant currency growth excluding the India business, Infrastructure would have grown by 1.8% QoQ

Application services

  • Applications Services remained flat QoQ in constant currency terms
  • If we look at constant currency growth excluding the India business, Applications Services would have grown by 1% QoQ

Mode 2 services

  • HCL saw good traction across existing clients as well as several new logo wins driven by the differentiation andthe mind share created for Mode-2 offerings
  • In several renewals, HCL also earned an extended scope for the Mode-2 services
  • HCL signed several strategic engagements like Modern Applications Services engagement with the Fortune 100 technology major

Digital and Analytics

  • In Digital and Analytics, deals are expanding from small to medium size to more significant scope aligned to the very core client’s business
  • Digital Applications, customer experience in Analytical Services for a global 100 European financial services organization
  • Big Data, Data Science and Predictive Analytics engagements with the leading Fortune 100 Courier Services and shipping provider
  • Digital Applications Services and support for a UK-based multinational semiconductor and technology company

Trend in digital deals

  • There is a market movement from Digital moving from POC Digital or experimentation of digital programs in enterprises to more mainstream digital programs or scale digital programs

IoT Works

  • HCL went live with the program for a European lighting major wherein they will be managing the company’s global smart lighting installations on a build, operate, transfer basis
  • HCL announced the opening of the Global Customer Remote Operations Center in Bangalore for thisEuropean client
  • Remote operations centre will be a key value proposition for HCL’s IoT Services in the coming quarters and can really open up a very huge market opportunity
  • IoT team also announced industry-leading solutions like Cold Chain Logistics Monitoring Solutions, Remote Service Platform Solutions for medical devices
  • HCL also entered into a strategic partnership with Siemens for Industry 4.0 solutions on MindSphere, a Cloud-based Open IoT operating system
  • Other interesting IoT work deals signed this quarter:
  1. IoT-enabled platform for a Fortune 100 Courier Services and Shipping Provider
  2. IoT Ecosystem for Nordics-based Global 2000 Manufacturing giant
  3. Predictive Maintenance Solution for a Fortune 500 Global Life Sciences Technology Provider
  4. An end-to-end IoT Solution for US-based Global Paper and Packaging Company

Cloud-Native Services

  • HCL is helping existing customers transition to Cloud as well as open net new accounts with the service portfolio
  • HCL has signed (+30) deals, small, medium and large combined in this segment in the last quarter
  • HCL is also signing milestone deals like the recent engagement being which is one of the first Cloud programs in the utility industry in UK where HCL will be responsible for full end-to-end Infrastructure and Application Migration to AWS Cloud
  • The Cloud-Native Services team has also built unique solutions along with partners like a solution called Containerized IT solution which helps them legacy to Azure Migration, built in partnership with Microsoft and Mesosphere
  • PowerObjects, the company acquired two years back is also punching in with opening new deals and building IPs on Microsoft dynamics 365 stack

Cyber Security and GRC

  • HCL is looking at dynamic security which is based on a philosophy of constant governance
  • It is built on a framework of governance and continuous assessment and uses best-of-breed technologies supported by Artificial Intelligence
  • With the roll-out of GDPR in Europe region, global enterprises are rushing to assess their compliance posture and work towards aligning their policies and controls

Total outsourcing deals

  • HCL is also entering into total outsourcing deals with managed security services as a component as well as standalone consulting-led security deal
  • HCL won an engagement with a leading North American producer of Coated Paper and Specialty products to manage their end-to-end security landscape
  • HCL is also working with a leading UK-based insurance company to deliver GDPR program and other security services for a leading global vehicle leasing company and also a North American bank as well as an Energy Services provider in Germany

Mode 3 services

IP partnership

  • HCL expanded IBM Partnership by signing a five-year IP Partnership deal which adds the IBM collaboration solutions to HCL’s growing portfolio of products and platforms offerings
  • HCL also restructured joint venture with DXC - changed the JV format into an IP Partnership arrangement

IRR expectations from IP deals

  • HCL is set to achieve double-digit sort of IRR from our investment
  • In 2016, one of the deals have completed one full year and HCL has seen that performance to be in line with what they had projected, in some of the products it is even better

DXC Technology partnership

  • DXC Technology partnership will involve rebadging of the people
  • HCL had two joint venture entities with DXC – one is known as CFT and other is CFES
  • In CFT HCL has 51% stake which is consolidated line-by-line
  • HCL picked up $58 million of revenue and very marginal loss in CFT
  • The current rate out of HCL-DXC venture is 22 million
  • When the joint venture was entered into, it was the CSC and now it is HP plus CSC put together which is now called DXC. Therefore, HCL will be now getting a share in the revenue
  • From a run rate basis, there will be less revenue which will get recorded from October quarter onwards and for this financial year it is 22 million impact
  • Last year revenue from CFT was 58 million and in H2 was 25-30 million and it is not expected that trajectory will improve much

HCL’s confidence to build IP partnership

  • One of the reasons that HCL continues to do these partnerships is because:
  1. HCL’s underlying strengths
  2. Partnership is giving good results, particularly some of these really battle tested, hardened products with very large installed basis, injecting energy, new features and capabilities in the roadmap allays HCL’s focus on the users and the communities around these products
  3. HCL is seeing really good return in terms of the response from these customers
  4. HCL also sees additional opportunities in terms of building service capability around these products

Performance assessment of IP deals

  • HCL is not providing deal-specific investments from Q2FY18 but all the investments get accumulated in license IPR line item due to client confidentiality reasons which HCL had overlooked in the past
  • Even though HCL has done large investments, our EBIT continues to be stable, our return on capital employed continues to improve
  • IP growth is also visible under Engineering and R&D Services which has had an impressive growth in addition to the regular organic growth that is possible on the ERS business
  • HCL has got competitive edge through IP partnership strategy and has the first mover advantage and HCL wants to capitalize on it
  • HCL is in the final stages of concluding similar partnerships with other technology players with whom it will work for a long time
  • A large part of IP revenue still continues to come from what HCL’s partner is selling and HCL’s sales channel is just starting to pick some momentum

Synergy with IP deals

  • An example of IP synergy deal:HCL brought very rich set of IP and all of the product managers, the deep product experts, the people with deep implementation skills around that product and then integrated that into the broader HCL service capability delivered it in one box to the customer
  • The model which HCL is looking to replicate, whether it is in the testing area or in a lot of the other categories of products, HCL is doing across these IP Partnerships

Internal IP creation

  • HCL filed 12 patents in next-generation technologies and platforms
  • HCL’s DryICE COPA which is Cognitive Orchestrated Process Autonomics Platform registered some excellent wins

Risks associated with IP partnerships

  • First risk is IP partnerships are complex relationships.HCL’s confidence come from the fact that they are working with trusted partners, companies that with whom they have had multi-year relationships and 360 degree relationships
  • The second key risk factor is maturity of the underlying technology.HCL is thinking proactively about innovation areas and opportunities to continue to extend the relevance of those products to expand the reach that they have within those installed basis
  • The third focus of the company is just  to continue to broaden both the breadth of products and the breadth of partners while preventing concentration issues

Performance in different geographies


  • US market continued its strong growth with 1.5% QoQ
  • This is on back of strong Q1 where US grew 3.8% QoQ


  • Europe put up a strong performance with a growth of 4.4% QoQ and a major share of this growth came from Financial Services
  • ROW declined 12% QoQ and a decline is largely due to India business

Performance in different Industries

  • Manufacturing and Financial Services delivered sound growth of 2.4% and 1.2% QoQ and 21.9% and 14.2% respectively on YoY constant currency basis

Telecom Vertical

  • HCL is doing lot of investment specifically in America a Telecom standpoint
  • New frameworks are being designed for customers (Big Telecos) to get on boarded
  • The investments that were going in were also getting diverted from the Mode-2 areas into Mode-2. So there was some shrinkage seen in the last few quarters
  • HCL is doing substantial investment in Telematics specifically in America
  • Through telematics, customers are finding new revenue sources, in areas such as track and trade, supply chainetc.
  • HCL also set up something very substantial in the China market for one of the big Telecos in Q1FY18
  • Shift from Mode-1 to Mode-2 has seen some softness in revenues but the investments in Mode-2 specially incutting edge areas will lead to upsides coming in the following quarters

Client Metrics

  • HCL did extremely well with top-20 clients growing faster than the company average, reflecting the strong performance of the client partner program
  • HCL saw strong client additions on YoY basis across all revenue categories

Segregation between inorganic and organic growth

  • Analysts expect organic growth to be 5-7% however HCL cannot call out the separation of organic and inorganic growth because after integration of the business there are too many dynamics
  • HCL is expecting not only an overall industry leading growth but in the inorganic business as well, it will deliver significantly in the top quartile of the industry

Acquisition of Urban Fulfilment

  • Urban fulfilment deal got concluded this quarter and a very small revenue of about $2 million came this quarter
  • The acquisition process got delayed by almost 2-2.5-months

HR ,Client and CSR Initiatives

Employee training

  • YTD HCL trained about 57,000 employees, 5,600 of which are on four Mode-2 skills
  • Employees continue to generate direct value for customers through HCL’s flagship Deep Platform Value portal, $500 million of impact was delivered in H1 alone

Client Partner focus

  • HCL is laser-focused on client partners who are successfully driving top revenue generating clients increasing sales and expanding footprint for HCLservices within the accounts

Women Leadership Development Program

  • Women Leadership Development Program made industry headline this quarter by winning gold at Brandon Hall Awards 2017

CSR activities

  • CSR arm of HCLTechnologies continues to drive sustained social impact both across India and our global communities