Diversified R&D and generative AI key to future growth, says HCLTech’s C Vijayakumar

Publication of the minutes of the last meeting of the US Federal Open Market Committee (FOMC) early January led to a surge in the National Stock Exchange’s technology index, which has gained 9% in a month on expectations of an early resumption to the rate-easing cycle in the world’s biggest market for Indian outsourcing. However, the commentary by Federal Reserve policymakers has had little concrete impact on most of its clients, HCLTech CEO C Vijayakumar tells ET, as discretionary expenditures by most US companies remain circumspect.Still, HCLTech, India’s third-largest software exporter with a market capitalization of Rs 4.18 lakh crore, beat analysts’ estimates to report a 6.2% net profit growth in the December quarter. In the absence of an immediate resumption in the expenditure cycle, HCLTech would harness deal conversions, a diversified R&D portfolio, and rising demand for generative AI to boost both its top and bottom-lines in the near term, Vijayakumar said in the post-earnings interview. Edited excerpts:

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What is your assessment of the broader demand environment?

Maybe, there is a little more confidence, but it’s too early for it to turn into a discretionary spending increase. Right now, we don’t see a difference between the last quarter and this one. It is the same environment. Probably, it will take some more time for the macro indicators to translate into (purchase) decisions. The markets are factoring in a quick recovery (due to the Federal Reserve comments). But I would want to look at really what’s happening with the client and see how this impacts spending. So, I would say the environment has been the same as what it was in the last quarter.You said engineering, research, and development (ER&D) demand will drive growth in Q4. Are you witnessing strong demand there?

If you look at the ER&D space, we service a very wide set of industries, starting from technology companies to telecom service providers, telecom OEMs, and a lot of industrial engineering, automotive, medical devices, and semiconductor companies. We have a wide cross-section of industries. Now, in the past few quarters, we have grown the ER&D business. Initially, when we saw growth in the September quarter, we were still cautious. In the December quarter as well, we saw some good growth and I see some growth in the March quarter as well. So, overall, we have seen good momentum in our ER&D business (accounting for 16% of revenue), and it is across industries.

How sustainable is the record margin expansion you have reported in Q3?

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Our margin guidance is 18 to 19%. And we will be within the guided range in Q4 as well. Margins in the December quarter are very high because it’s a seasonally strong quarter for the software business and you would have seen a 32-33% operating margin in the software business. I think that is the reason for the spike in margins. Usually, in the December quarter it happens. In Q4, we will be in the guided range.

You have reported consistent conversion of deals to revenue in recent quarters. Has your sales approach changed?

One basic difference is that we call out only net new deal wins. We do not include renewals, rate card deals, or framework deals in our booking numbers. So, when it is a net new deal that is confirmed, (it refers to) signed contracts with clear timelines for transition or ramp up. So that way, our bookings will directly correlate to the revenue model in general. We have a one- or two-quarter delay. I think it’s the definition of bookings that is probably giving the right correlation between our revenue and booking.

Can you give us a sense as to why the rest of the world has seen a decline while the top geographies continued to grow?

The rest of the world is a smaller part of our business and we saw some ramp-downs and there was a furlough impact, which caused this.

We are focused on the rest of the world, and you will see some traction going forward. Australia-New Zealand, Asia Pacific, Middle East, Japan, and South Africa are the five key geographies for the rest of the world business.

When do we see AI demand percolating into revenues?

I think it will take two to three quarters at least before some of this translates into some meaningful revenue. We saw a lot of enthusiasm and conversations and we are already implementing several projects. We won 30 projects in Gen AI in the last quarter. They’re all sub-million dollar programmes and but each one of them has a good future potential. Because once the first phase is implemented, then customers generally tend to look at how they can strengthen or put in place a stronger foundation to leverage generative AI more widely. This means they will spend on data and multi-cloud solutions. They will spend on security. It’s the surrounding spending that’s going to be visible on the generative AI. There will be some cross-industry use cases and that’s where we are going to first focus on.