Eight things we gathered from the HCL Tech Q1FY23 results

The second large IT company to announce June quarter results, HCL Technologies, announced a 2.11% growth in net profits at Rs3,281 crore. However, on a sequential basis, the net profits fell by 8.83% as the operating cost pressures mounted. Manpower, travel and attrition have been the big challenges for HCL Tech in Q1FY23. For the quarter, the consolidated net revenues grew by 16.92% to Rs23,464 crore. Top line growth remained robust and even on a sequential basis, the top line revenues were up by 3.83%.

What we read from the HCL Q1FY23 numbers

While HCL Tech was the second large IT company after TCS to declare quarterly results, it is the first company that provides guidance, since TCS does not give guidance. Here is what we read from the numbers of HCL Tech.

    1) New deals is a big driving factor for IT companies and HCL Tech is no exception. For the quarter, the total contract value (TCV) of new deal wins stood at $2.05 billion. That is nearly 23% higher on a yoy basis. The large deals continued to be robust for the Q1FY23 quarter for HCL Tech, and that tempo has been continuing for the last few quarters.

    2) Digital has emerged as a strong theme for HCL Tech with the digital driven services business growing by 2.3% on a sequential basis and 19% on a yoy basis. Chunk of the services growth was driven by digital engineering and digital application services with a major theme being cloud adoption.

    3) Like in most IT companies, HCL Tech also faced a problem of rising attrition and falling operating margins. For the Q1FY23 quarter, the operating margin stood at 17% while the attrition rate rose sharply from 21.9% to 23.8% in Q1FY23 on a sequential basis. HCL Tech has been betting heavily on freshers to address the manpower churn.

    4) The top line growth was largely driven by technology vertical followed by TMT, manufacturing and BFSI segments. The growth rates were robust for the top five verticals at 34.2% for Technology & Services, 29.2% for Telecom / Media / Entertainment, 19.1% for Manufacturing, 16.4% for Financial Services and 15.7% for Lifesciences & Healthcare.

    5) Attrition remains the major concern for HCL Tech in Q1FY23. On a yoy basis, the attrition rate has virtually doubled from 11.8% to 23.8%, and that is the trend across the IT industry where the sudden surge in demand for IT services has made qualified IT professionals a rare commodity. This has also led to an increase in the training and manpower costs, putting further pressure on the operating margins.

    6) HCL Tech saw good traction across client categories with 3 additions in the $100 million -plus clients category; 5 additions in the $50 million - plus clients category, 23 additions in the $20 million-plus clients category, 35 client additions in the $10 million-plus clients category and 27 additions in the $5 million-plus clients category.

    7) HCL is accelerating digital transformation journeys of clients. Growth at HCL Tech has been largely driven by digital engineering and digital application services with cloud adoption being a horizontal theme across all services and verticals. This is largely in line with the changing demand of the clients where most demand comes from digital.

    8) Like most of the large IT companies, HCL Tech has enjoyed robust cash flows. For example, the cash generation as defined by Operating Cash Flow (OCF) stood at a healthy $2.02 billion while the free cash flow (FCF) for the period stood at $1.76 billion. The ratio of operating cash flow to Net Income was 112%.
However, the stock of HCL Technologies has not reacted too positively to the results. The stock is 1.3% down at 915 and even touched its 52-week low during the day.