HCL had cautioned investors about macroeconomic challenges in December. Has your perception of the on-ground situation changed?
Customers want to continue their tech to expand, whether it is cloud adoption, operating model changes, or even a little bit more efficiency-led opportunities. So as we move forward, I see possibly two broad themes. I think the growing tech spend is really coming from the broad commentary that technology is becoming more and more core to the business.
So clients look at this spending as a very important dimension to transform their businesses. Now, between the US and Europe, I think the overall tech spend will go up. But some decision-making on new programs in Europe could be a little slow, given a little more uncertainty, whereas in the US on the core digital transformation programs will continue. And it will get supplemented by a little more efficiency-focused deals. That’s what we’re seeing.
What gives you the confidence to win a large share of vendor consolidation deals in this market?
Overall, our capability is very broad-based. And if you look at the six Gartner IT services magic quadrants, HCLTech is the only provider in the leaders’ quadrant in all six magic quadrants. Next, we have a very strong client base. And when customers are looking at vendor consolidation, they’re also looking at what is called IT operating model change. So they’re moving to a product-led operating model and are looking at integrating infrastructure and application.
So I think these are the areas which are sweet spots for us. So it’s not just vendor consolidation getting driven for just reducing the number of vendors or cost. But providers, like us, who are able to lead them to the IT operating model journey, will have better success.
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But will this help maintain the price premium wins that came last year?
If you look at what has happened in the last couple of years, the cost of talent has gone up. And once it goes up, it doesn’t come down, right? There is no elasticity in wages. So I think that’s kind of resulted in price increases to the customers. So all the new deals we’re signing from 2022 have all been at the new price point. I think we’ll be able to sustain our win rates and booking even with the increased price points and we have a little flexibility there.
Do you think the industry is heading to a phase where margins will have to be sacrificed for growth?
I think most companies will have to manage both growth and margins, right? I think that’s what the expectations are. So we have to see how we can continue to become more efficient, bring more automation into the operations and the solutions will have to be driven, with significant automation inbuilt into the overall solution. I do believe there is enough opportunity to grow at the current margin levels without compromising growth.
That’s the outlook, as we see, but of course, there are so many things–currency headwinds and changing macroeconomic dynamics always play out on how margins evolve over a period of time.
How will you ensure profitability in a situation where costs are rapidly rising?
We called out for four levers. We’ve embarked on the journey of increasing freshers over the last three years. So that definitely is one lever which will give us a better pyramid and better talent base. The second is utilization. We’ve hired a lot of freshers–almost 30,000 freshers in the last 12 months. So now, some of the services require longer training.
So some of them will complete training and will be deployed. And for the contracts, which are coming up for renewal, a little bit of improvement in the realization and pricing is the third lever. And the fourth is trying to bring a little more automation in the fixed price programs. Fifth is to get a better leverage of the operating models, like near shore, leverage offshore, all of that will also drive better margins.
Will HCL offer a buyback opportunity in the near future?
I think there are several considerations which we have discussed, and we follow the path of dividends. I don’t see a change. I think more importantly, our capital allocation policy has significantly changed over the last couple of years. We are committed to return more than 75% of our net income. Of course, that’s over a five-year period, but mostly every year you have been seeing more than 75% returned.
Is it more lucrative to look for M&As in this market environment?
I mean, the core M&A strategy revolves around capability based tuck-ins, which means there are some specific areas or geographies where we need certain capabilities, or some domains… That’s really what we are focused on. But we are really not focused on any large acquisition. But of course, if there are good opportunities in a specific market situation, we would look at it.
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