Q&A: HCL Tech says it will bring margins back in 19-20% band

"I can assure you we will have a strong exit. Because Q3 is going to be a strong quarter, Q4 will be another strong quarter on top of Q3," Vijayakumar said in a post-earnings discussion with CNBC-TV18.

Vijayakumar: We would have expected a little bit more revenue, but if you look at the Q2 revenue breakdown, there are services and then there are some assets, which are also embedded into the services P&L and then software. Our asset revenue was reduced to about 25 million. It's a very tactical thing. That kind of dropped by 25 million based on some projects, where execution was complete. Other than that, if you take the services within services, it is a pretty strong growth, it's probably close to 2%.

Vijayakumar: Yes.

Vijayakumar: Remember, first of all, the nature of our businesses is different and if you look at our outlook for Q3, it's informed by three factors. One is the large deal which will go live by the first of November, which is going to give us some significant revenue in Q3.

The second aspect is for the software business, it is seasonally one of the top quarters, which means O&D will see a spike in the software business. And the deals that we have signed in the last two quarters some of them the transitions are over, they will go into steady state starting maybe end of October, onwards.

Also, there is some flowthrough impact of the revenues that we had in September, which will have a full quarter impact. So all of this adds up to a good outlook for Q3. And a similar extrapolation to Q4 is possible because even the large deal will continue to have incremental growth in Q4, on top of Q3.

Vijayakumar: We do not call out our clients' numbers, but of course, a lot of optimism is built. We are going live, things are on track I think that's what is giving us this optimism.

Aggarwal: So, there are three or four factors. I think if you see the cost breakup that we give in great detail, on one of the pages of the investor release, there is a sharp reduction in the expense on third-party contractors, which is 70 basis points drop. Apart from that other discretionary expenses, like travel, legal expenses, and other discretionary expenses, also saw a sharp drop of 50-odd basis points. Then, of course, the headcount reduction also led to some savings there. So, in total, we have driven a lot of cost savings this quarter and that has delivered, it's actually 150 basis points improvement on a quarter-to-quarter basis, it is a 50 basis points improvement on a year-on-year basis as well so, that is what drove that.

Aggarwal: So, Q3 should be about 60 to 65 basis points, and Q4 should be another 25 to 30 basis points on top of that.

Aggarwal:  That's an excellent question and a very intuitive one. You are absolutely right, we have voiced an aspirational margin to get back to the 19 to 20% band and that is what we are very laser-focused on. This year is 18 to 19% we started the first quarter week at 17% so that was like, a little below. And we have ramped that up in the current quarter and we will definitely be in the 18 to 19% for this year. Obviously, it's a slow growth year, compared to last quarter. I mean, last year, same quarter, we had a service, growth of 19% those days are gone. It's a different macro that we are going through right now. But the margins will also follow the revenue growth as and when we get that growth back.

Vijayakumar: We have a very, very good large deal execution track record, I mean, right from the days of Volvo to many, many large opportunities we have executed, which is across multiple geographies, multiple technologies, all of that we have executed well. And that's what we are going to do for the current strategic partnership that we have in hand.

I think it will continue to give us good momentum going into FY25. But I think it's a little too early to kind of view what FY25 will look like. I think the planning cycles are getting a little shorter, whatever plans you make may not hold good three months down the line. So there are too many variables at this point for us to get any sense of 25. But all that I can assure you is we will have a strong exit. Because Q3 is going to be a strong quarter, Q4 will be another strong quarter on top of Q3. So we will exit strong, I have visibility only till then then we will have to see as it comes.

Vijayakumar: So last quarter, it was at an all-time high with the $4 billion of closure obviously pipeline has come down a little bit. But there is also a lot of new pipeline, which has been added. So at this point, I am 10% to be precise 9% below my peak pipeline that's where we are and a lot of that will convert this quarter and next quarter, which should give us some more momentum into FY25.

Vijayakumar: To be honest, the $4 billion is an outlier. We have been talking 2 to 2.5. So my aspiration will be to get closer to 2.5. Even though our baseline is generally 2, in a good quarter, we could get to 2.5 that's the kind of band that we are working on. 2- 2.5 billion, and once again, I want to reiterate, that the bookings that we disclose are all net new bookings. These are all new deals, firm deals that are signed. This does not include rate card deals or framework deals, this does not include renewals. So it's really incremental commitment from the customers. That's what is counted in the new bookings that we disclose.

Vijayakumar: See, manufacturing was a was a technicality. Initially, I talked about assets, 25 million was less than that had a big contribution coming from manufacturing verticals. So from a pure pure service, I think it will continue to do well. Technology, I think we had a very small decline this quarter. I would say it will take a couple of quarters for the tech vertical to start showing good growth.