Hi everyone. Good morning, good afternoon, and good evening. Thanks for joining us today for our 90 minutes with C Vijayakumar, CEO of HCL Technologies. CVK, thanks a lot for joining us today. It's a pleasure to host you. We'll start the session with a brief introductory remark from CVK, and then I think we can dive straight into Q&A. CVK, over to you. Yeah, yeah. Thank you, Mukul, and good evening, everyone, for joining this interaction. I think largely our outlook remains pretty much the same as what we shared at the end of Q3, which was middle of January. At a high level, we continue to see good demand. The nature of demand has shifted, as you would have heard from all the industry players. There is some kind of shift in the demand pattern, which is a little less discretionary, more on cost optimization, efficiency-led opportunities. Vendor consolidation is a predominant theme across a large number of clients. That is really the broad industry outlook. Based on all the interactions with the clients, I do believe the core transformation programs that our clients are pursuing, they remain very committed to the core transformation programs because they believe it is very strategic. When they initiate a new program, obviously, there is a little bit more caution and a little bit more criticality of when do we get the returns, is it the right time to start, can we save in some areas so that you can reinvest in some additional programs. Those are the broad conversations that we are hearing. Largely in line with what I shared in January, maybe we can go into some questions, Mukul. Sure. We will start with the Q&A now. I think everyone is familiar with the format. If you have a question, you can either raise your hand. You can also post your question in the chat box. We will ask on your behalf. You can also unmute yourself and go ahead. I would suggest to start the discussion. Obviously, the big focus right now for everyone is on demand visibility. It has been, I think, a fairly uncertain last 12 months. When this slowdown will come is, I think, something which is the most common question. How are things currently? Yeah. See, I think one of the few indications, very objective indications of demand will be to first look at our own pipeline. Our pipeline continues to grow. That is what we are seeing. Now, within that pipeline, the mix of larger deals are a little higher than what it used to be, and the mix of smaller deals are lower. Smaller deals are usually the increased spend in a lot of existing clients, which comes as a smaller statement of works, which is increasing application modernization, analytics, and those kinds of things. The mix is slightly shifted, not very dramatically, I would say. It is a slight shift towards more efficiency-led and vendor consolidation-led opportunities. The overall demand is higher than what it was at the end of October and even at the end of December. Right. So from a spending perspective and just looking at it from a CY 2023 budget perspective, things have actually started looking up. Is it fair to imply that? See, while we still do not have a very firm view of all the spends from our top clients, I think since January, one conversation that is there with each client is, are we going to continue with the core programs? That answer has been very positive. The core programs customers are continuing with. Of course, there is always a desire to do more for less. They are looking at, can they do more offshoring, especially some of the big tech companies who were not so particular about offshoring. Now they are a lot more open to offshoring, and efficiency and optimization is dominating the conversations with especially the tech companies, which is, again, a reasonable part of our portfolio. Now, I see that as an opportunity because we have a very strong proposition across all the service lines, whether it is product engineering, product sustenance, and all the IT operating model changes and efficiency levers. They are very strong for us. That is the kind of conversation we have been having with our clients. Right. Another question, obviously, which is coming up often after the results from the three large hyperscalers, their growth over the last, I would say, four quarters has slowed down quite materially. While you have been highlighting the near-term decoupling because of the excess prebuying of cloud space, is that something which is kind of entering a concerning territory that maybe if it continues to slow down aggressively, it might have an impact down the line in terms of revenue, which you guys might generate due to the implementation and maintenance? See, Mukul, we continue to see cloud as a very strong growth opportunity. Now, while the growth rates of hyperscalers have come down, it's probably come down from the peaks. Hyperscaler-related spend is still the highest or fastest growing opportunity in the overall tech landscape. If you look at that, it's still a strong opportunity. A lot of big customers, if I were to kind of take a sense check of all the large customers, is there any change in their cloud strategy due to the current economic environment? They are not slowing down. They continue to move at the same pace. Cloud migration is a long drawn affair. It's not a straightforward lift and shift type of thing. A lot of customers are already on the path of significant modernization of their application landscapes to really benefit from cloud. We do not see any change. However, most cloud providers, hyperscalers booking are either a three-year or a five-year commit that large customers make based on which they get an attractive kind of offer from the cloud providers. Having committed to that, they want to see how to fully leverage it. If at all there is some change, it is really how can they really accelerate and leverage the best of the investments that they have made on the cloud providers. I continue to see it as a very, very positive opportunity. The speed of execution is only increasing because they have committed to certain spend, and they want to at least make sure they are leveraging what they have committed. Sure. Before I move to the next question, just a reminder, you can raise your hand to ask a question, or you can post the question in the chat window, which we will take note. CVK, the other part of what you were talking about, about technology companies kind of doing more in the recent few months and sustenance, and in particular, the impact which will happen. You guys do a fair bit of sustenance work in the R&D part of the business. How should we see the mix of R&D between sustenance and new development? Because there is still a concern that new product development will slow down because of macro concerns. Is there a regional SKU which is there, which can actually have an impact on our growth? See, in R&D, if you look at some of the large, our R&D business is a very large part of our ER&D business, is U.S.-centric, right, in terms of the overall presence. In terms of industries, it's largely equally split between asset-light industries, which is tech, telecom, and those types of industries, to asset-heavy industries. I think there is a clear differentiation in how each of these asset-light and asset-heavy companies are looking at it. In the asset-light companies, there is definitely some moderation of the tech spend by product companies. Now, it is trying to do more with the same dollars. That's one trend we are seeing, which means more work, more offshoring, and things like that is a predominant theme. General product engineering or product sustenance outsourcing, I think we are seeing a lot more traction now than before. That's on the asset-light industries. Asset-heavy industries are still driven a lot of transformation around Industry 4.0. They are all driven by being more competitive, which really manages supply chain better, and digital manufacturing. All of those programs continue. We have not seen anything which has stopped in those areas. Overall, I see the growth in outsourcing in R&D will continue. It's a very big market. Of the $900 billion opportunity, only $90 billion is outsourced to either a service provider like us or to the captives. I think that is going to only accelerate more outsourcing, more captives. Significantly, it's going to accelerate. That's the way we see it. Right. Just to follow up on this, is it what do you see this macro slowdown as a sort of silver lining for companies to nudge to outsource more work to partners rather than do it internally when they have pressure to kind of trim their expenditure? Yes, I think so. Because see, it may not be like, I mean, it may not be a very immediate near-term opportunity, but the pipeline that's building up is very reflective of that, which means it might take a quarter or two to kind of convert them. Definitely, there are a lot more initiatives which are getting triggered, which is around more R&D outsourcing. Right. Does it mean that you are exploring options to do rebadging sort of opportunities? Because often that kind of comes with the domain. I think that is something where some asset takeover also often happens. Are you open to kind of picking back up on that kind of model? See, I think it all depends on the overall opportunity. Generally, our approach is an asset-light model, whether it is in, see, this whole, there is very little of asset takeover kind of opportunities. The market for engineering services, it's almost 99% services-led. There could be some people takeover and optimization and things like that, which could happen over a period of time. Each of the opportunities we evaluate, I mean, rebadging is a core part of our strategy, so that will continue because customers want day-one saving. Customers want to retain domain knowledge. Given all that, it will continue to be one part of the strategy. The infrastructure deals, asset-heavy deals, we do not do. I mean, I think it, I mean, over a long period of time, we believe it's not a good business strategy because that's how some of the traditional players in the past have grown a lot of revenue. Now, with cloud migration, a lot of those assets and all that are getting decommissioned, and they're moving to cloud, so there is a big revenue hit. Similarly, data center takeover is also not a great long-term business because it's all going to ramp down. That's been our strategy, and that's really worked extremely well for us. Being disciplined in what kind of infrastructure deals do you really go after and sign up is a very important part of the long-term growth strategy in the infrastructure business. We stayed kind of quite committed to that strategy. Sure. We'll take a question from Prashanth Guttari. Prashanth, can you unmute yourself? Yeah. Hi. Yeah. Thank you for giving me the opportunity. My first question was, what is the margin impact of the mixed change that you're seeing on your business? You mentioned a couple of things like moving away from maybe more discretionary business towards more kind of cost optimization type of deals. Secondly, not having as many smaller projects, which are maybe more kind of increase in scope kind of work, which I believe is kind of maybe more margin-accretive for IT companies. We're just trying to understand what is the overall kind of margin impact of the shift that you're seeing on the kind of the demand sides. Yeah. Prashanth, I think first is the shift is, let's say, it was a 50/50 kind of landscape. It's probably moving 10%-15% one way or other. There isn't a big margin delta between an incremental, let's say, I mean, if you do a deal the long term, maybe the first 12 months, it could be a little lower. Generally, most opportunities, whether it is cost out or incremental spend, we are continuously looking at how to get to company-level margins, at least in year two. Year one, there could be a little moderation, but year two will be perfectly fine. That's the way we see. I think the true margin levers are coming from some of the efficiency-led deals are more offshore-driven. That intrinsically enables a slightly better margin profile. That kind of makes up for the overall deal margin profiles. That's one. Of course, the biggest lever that we have on margins is our fresher engine, is something which we traditionally used a significant amount of laterals. Over the last two years, we have significantly focused in building the training infrastructure, building a lot more fresher absorption into a lot of existing delivery. I think that is a journey which still has some more legs to go. We will probably have to continue the similar levels or higher levels of freshers intake for a couple of more years. I think this will give us a lot more benefit on the overall margin profile. There are other levers like nearshoring. Nearshore strategies also become very critical for a lot of customers with the geopolitics and all of that. A lot of customers are looking at nearshore. We have good 15 locations. All of them have very meaningful presence already. It is now a matter of scaling them up. That is one more lever. A lot of managed services deals continue to have the opportunity to bring more efficiency and automation. That is the third lever. Of course, rate increase has been a good lever in this year. It may not necessarily be a big lever moving forward. Overall, there are multiple levers to improve margins, which is what we highlighted in the last meeting as well. Sorry, just on nearshoring, would it be in terms of margins, where would it stand? Is it like somewhere between India and kind of onsite margins, or is it as good as? Yeah. Directionally, that is where it is. It will be better than onsite and maybe slightly lower than offshore. Understood. Okay. Okay. How should we think about the strategy on the product and platform type of business? Because this is something which has not grown well for us. Obviously, it generates a huge amount of cash flows. Where does it sit in terms of our overall strategy? How much focus will have on it going forward? See, software has been a, it's a multi-year journey to diversify our portfolio and really insulate it from the variations in the discretionary spend as well as commoditization of IT services, right? That's the rationale. It's a multi-year journey. We have done well with respect to the business case. We believe the portfolio will grow in the medium term. It may not be at the services level, but you will continue to see an increasing trend of growth based on all the interventions that we have done and we continue to do. I think it will not grow at the services level, but the growth project profile will continue to improve. Understood. Just on the overall growth then, I mean, is there any KPI for the management which would link kind of the compensation to relative performance against peers? I mean, I think some of your large peers have that kind of mechanism. Is there something similar within HCLTech? Yeah. Yes, absolutely. It's linked to three things. Of course, relative revenue growth, relative net profit growth, and relative total shareholder return. These are the three metrics for the CXOs. Okay. Okay. Understood. Thank you very much. Thank you, Prashanth. The next question is from David Dugdale. David, please unmute yourself. Yeah. Hi. Thank you for the presentation. Over the last few months, there's been a lot of excitement about sort of ChatGPT. One of the first applications that's done by Microsoft is their sort of Copilot to sort of improve the efficiency of programming. Do you have a view on sort of how much it will increase software engineer efficiency by? In the longer term, sort of the abilities of ChatGPT increase, is it a threat to your business model in terms of some of the low-end programming stuff being done by ChatGPT? Thank you. Yeah. David, great question. See, the Copilot has been, I mean, Copilot has been there long before ChatGPT got introduced. I think the way truly it helps is our ability to train fresh talent is really getting much more efficient, right? I mean, while you get them through a learning program, when they get onto the job, using a Copilot helps them to become better, faster. I think that's a very, very good intervention, especially in our industry is so much dependent on getting fresh talent, getting them productive very quickly. I think from that perspective, Copilot is a great, great option. In fact, we have a program where we hire 12th-grade students globally, put them through a one-year boot camp, and then after that, they're into very good software development work. For them, this Copilot is a great assistant to help them refine and increase their speed of software development. I see that as a positive thing. Overall, if you look at the generative AI solutions, it is going to simplify customer support. Customer support is an area where there has already been a lot of automation. Probably it will take it to the next level. It will need a lot more instrumentation to make it work. We are still in the early days. We are just testing out not so much of an enterprise use case, but a consumer kind of a use case which can be deployed within an enterprise to train people, make people more effective, provide better customer support. It is too early to really see how much it will have an impact. My sense is it is going to make us more productive. There is also more intensity of what we need to do. It is a continuous journey where there are more technologies which make us more efficient, more productive. I see this as one more step in that direction. Perfect. Thanks for your thoughts. Thanks, sir. CVK, I think just to continue on this ChatGPT thought, is it something which can down the line, once probably the use cases increase, end up as a self-serving platform where enterprises can use this to do a lot of development work internally through kind of simple commands? Or do you see this as potentially always be a complementary business with what we do? We see it like the whole automation. It is always it augments the humans to do better. I see ChatGPT also in the same line. It, of course, is a it's not just a small evolution. It's a significant evolution. It will be even more helpful. That's the way I see it. It really doesn't replace software developers, certainly, so. Right. On the margin side, given the way the supply side has been unplugged over the last, I would say, few months, do you think this is something which can meaningfully improve profitability across the space? Do you think this will kind of encourage you to, again, rely a lot more on laterals, which is what you used to do, or is the fresher program here to stay? No, no. I think, see, that is a big change that we did two years ago to substantially increase or probably be in line with the industry as to how much freshers are we absorbing on a year-on-year basis. I think that's a fundamental change in the supply strategy that we have. That will continue. We believe we will continue to hire pretty much similar levels of freshers as we have done in the last 12 months, in the next 12 months. That's definitely the strategy moving forward. All right. Just coming back to one of the points which you mentioned about pricing being a helpful factor till now, with the way the macro environment has changed, and obviously, the supply scenario pressure also is easing, are we rapidly kind of moving into an environment where we will again see extremely high competition leading to pricing being a headwind rather than a tailwind? See, Mukul, we have, I mean, while there have been some sporadic cases where customers have asked for some reductions and things like that, we are not seeing a trend that there is a lot of, we are not seeing a trend of trying to get, I mean, discounts and things like that. We have not seen that. I think customers do realize that the talent costs, I mean, the wage hikes which have already played out, it is not something which can get reversed easily. Normally, wages are something which moves only in one direction. It keeps going up. It is not something where we can reverse it. Of course, there are some long-term strategies in terms of pyramid and things like that, which will help us to reduce the average resource cost. Those strategies are still very intact. I do not see any trend or anything where customers are asking for significant discounts or anything like that. Sure. The other point also, which, again, vendor consolidation has been a theme which both you and your peers have been talking about. Just trying to make some sense of it, because when we look at even smaller guys in the ecosystem, everyone is almost near reporting their historical peak deal numbers. Effectively, who is losing? Because if everyone is kind of gaining, then where is the consolidation? I don't see that everybody is gaining. There is always, even in the large vendors, there are always some providers who are a little bit weak, and they're not on the top of the mind recall for some of the clients. We continue to see more consolidation happening. For a provider like us, now we are rated as a leader in all the six Magic Quadrants of Gartner IT services. We have presence in all geographies. We have delivery in almost all parts of the world where clients are looking for. Our services are also much more broad-based: digital services, infrastructure, engineering, business process. It is very, very broad-based services. I think that's where the gain is going to come from, from some of the large players and some of the mid-sized players and a lot from boutique vendors. Each customer, they may have 50 to 100 vendors providing services. They may want to consolidate with three or four. That is a big trend we are seeing. I mean, it's just an unimaginable number of opportunities of consolidation that's happening. Just a reminder to everyone, you can raise your hand to ask a question. You can also unmute yourself and ask the question directly. CVK, again, coming back to the P&P side, that has been, I would say, a bit of to look at the kind of cash it is throwing out versus the growth and the volatility and profitability. Over the longer duration, how do you see the P&P as part of your overall mix? Is that something which can act as a material driver of your long-term performance? From which areas is that something where it can either complement or act as a force multiplier for services? Yeah. I think definitely the software product business has given us presence in so many geographies where we are traditionally not a big provider, like LATAM and some of the European countries, where our presence with respect to the total IT spend in that market is a little bit under-indexed and in some of the Asian geographies. I think it's given us presence. That's also giving us more deal flows because one of the deals that we concluded in the September quarter and which we have announced as well is because we were there as a significant software provider that helped us entry into a very large client. That eventually converted into a significant big opportunity. There is a good inflow of such opportunities into our pipeline. I think it's definitely helping our services business in a meaningful manner. This is only in the beginning of this whole cycle, right? I mean, because there are thousands of clients in so many geographies. The more and more we are able to focus and mind these, it's definitely a positive influence on the overall services business. Now, I don't see the proportion of the software business changing much. I mean, there may be a little moderation in growth in products compared to services. That might slightly change the mix. We are not looking at adding any inorganic or anything like that because we have a good mix of products, and that's a good platform to continue to build on. Right. In terms of organic investments into the product side, while you have discontinued a few products recently, do you think some of the others still require a meaningful organic investment to kind of accelerate in terms of growth? Or do they still, are they currently in a space where they can accelerate without any investment from your end? See, I think there is, I think the cost structure of the software business and the margin profile, I would say, has stabilized, right? I mean, initially, margins were very high because we had not ramped up some of the investments. Like a couple of years ago, the margins were much higher because we were still building the sales organization, still building the engineering teams and things like that. Over the last, I mean, if you take on an annualized basis, the margins have stabilized in a very close range of ± 1 or 2%. That's what I see. I don't see that changing. If you have new investments to be made in products, of course, there's some existing work would have come to an end. Now we are focusing on some new areas. We are committed to continue similar levels of investments. I mean, we are also very conscious of the margin profile. We want to see how to gradually increase margins even on the product business because there are levers like still a significant part of our engineering talent is in high-cost geographies. There is always, as more and more new solutions are being launched, we can drive this as a more offshore leveraged operating model. Sure. Next question is from Prasad. Prasad, please unmute yourself. Yeah. Hi, CVK. Also, one generic question, not specific to HCL. When we, I mean, if we are actually looking at a period of vendor consolidation, and suppose, let's say you win some deals and you lose some deals, and the deals that you win is actually reflected in the order book, but while the deals that you lose is not reflected anywhere. In that context, how should we look at in terms of what could be the impact on the existing business? Should we, I mean, just going by the order book, can it be misleading? You can spend some light on that. Yeah. I think order book is all the new deals. There is a renewal component as well. Usually, renewals are in the high 90s. That's been the trend. We've hardly ever lost a renewal in the last several years. There can always be projects which will come to an end, and there may not be a new project to replace. A lot of these annuity deals that we have, it largely renews and we continue it. In fact, that is an opportunity to add more, so. What I meant was, suppose, let's say if the absolute spend by the client is not increasing, it is just shifting from, let's say, player A to player B, and some other spend is shifting from player B to player A. The existing book itself could be declining, while the new orders would be adding on to the order book. That's a possibility. I think the best way to see is take the last 12 months booking, new bookings, and the last 12 months growth, right? I think growth in bookings and growth in revenue should be a very good indicator of growth overall. Got it. Could that churn in the. I think there are two leading indicators. I mean, one is the booking growth, and the second is the headcount growth. I think these two are the best reflection of the overall. The churn in that existing business, so is it higher than normal? Is that what you're saying? Not for us. I think, yeah, it's quite the same. There may be more, I would say, more vendor consolidation that clients are doing than ever before. There may be more opportunities. The churn itself, I think, is very, very low. It's a low single digits type of churn as well. Got it. All right. All right. Thanks a lot, CVK. Thanks, Prasad. The next question is from Ashish Chopra. Ashish, please unmute yourself. Yeah. Thanks, Mukul. Hi, CVK. Just one follow-up on Prasad's question. If you could maybe walk us through how the overall churn in renewals have trended over the past few years. I think at one point of time during these very large renewals, the churn had gone up to as high as 30%. If we recall, this had collapsed quite significantly during the COVID period where the tendency was for the customers to continue working with existing vendors. How has that shaped up? Now with, I think, what we understand from ISG, a very large renewal book up for grabs in the coming years, how do you expect that to trend going forward? Yeah. I think if you take the, Ashish, if you take the overall book of business, which is across the industry, then maybe 30% kind of churn during renewals is what was there. Our renewal success is like 96%, 97%+. That is a number which has been stable. Sometimes it has even been 98%, 99% as well. That is our renewal rates because of the quality of service, because of the overall business model. We tend to have a very, very high retention rate. During COVID, yes, I think some of the incumbents' customers chose to continue with the incumbents in spite of them having a good reason to change because of the transition risks. Now I think customers are a lot more open to pursue whatever they had in mind earlier. A lot of those renewals with some of the incumbents happened for one-year, two-year kind of scenarios. I think now customers are more open. I think that whole renewal or rebate market is again a strong time for us to go after. Some of that is also in the vendor consolidation, $120 billion kind of TCV. It's part of that. Understood. Would you characterize the, I mean, the churn today of the incumbent getting churned out as back to pre-COVID or somewhere in between pre-COVID and COVID? Just your thoughts. I think it's back to the pre-COVID levels, I would say. Understood. That's helpful. Thanks. Of course, these are very rough estimates. Thanks, Ashish. Sure. Got Sure. Got that. CVK, one question which was there was on capital allocation. Obviously, you have increased your payout ratios recently. In terms of the investment requirements in the business, which are the areas where you still see meaningful opportunities for HCLTech to invest in? Is that something which will be more towards services side, P&P, or on the R&D side? Yeah. I think we do not have any investment plans on the product side. As I said, we have a good portfolio, and we have presence in the areas where we think we should play. There is nothing planned. There can always be some very small things which add a capability or two. There are still opportunities on the services side in terms of improving the vertical mix in some areas. R&D is again a space where we are very strong. A very big part of our business is in the US, but maybe we can look at some more opportunities in Europe. In terms of some of the high-growth areas in R&D, like semiconductor, like automotive, they are more capability-led, and those could be some areas of investment. On the digital business, largely all the areas we have good capability, and we are growing that quite well. There could always be interesting opportunities which can come up in an environment like this. Some smaller investments is what we think is expected. Sure. A reminder to everyone, if you have a question, please raise your hand or unmute yourself. We will otherwise take last few questions before we wrap up the call. CVK, in terms of newer areas on services which might potentially come up over the next few years, not near-term, but over longer term, obviously, ChatGPT was one topic which was discussed, but what were the other areas which you think can be transformational for us from an opportunity point of view? Yeah. I think this whole solutions around sustainability is probably the biggest theme which is going to play out in the next few years. I do believe it is the next digital kind of wave. Whether it is building sustainable products, very strong capabilities for us in the engineering services, or building run solutions which provide a lot more sustainable outcomes, I think both of them are big opportunities. This comes in multiple ways. I mean, sustainable solutions, you can break them into about 10-15 solutions. That is where we are, from an organic perspective, we are focused on how do you bring all the capabilities that we have to really cash on this big opportunity that is ahead of us. Sure. We'll just wait. Sure. Looks like there are no other questions. CVK, thank you so much for taking out the time to speak with us. It has been, as always, a very interesting discussion. Yeah. Thank you, Mukul. Thank you, everyone, and have a good evening. Thank you.