HCL Tech leads Wipro, peers in weak December quarter

, : HCL Technologies Ltd has emerged as the best performer among India’s top four IT services firms in the seasonally weak December quarter, heading into the final leg of what’s expected to be a slow financial year for the sector. Both HCL Tech and Ltd, which also reported quarterly numbers on Friday, beat market estimates, making Infosys Ltd the only one of the top four–the biggest being Tata Consultancy Services Ltd–to miss Street projections.

Even so, Infosys, which announced its numbers on Thursday, as did TCS, saw the biggest single day gain for its shares on Friday since July 2020 as its earnings turned out to be not as bad as analysts had feared. Now that the industry heavyweights have announced their third quarter earnings, analysts and at least some industry executives seem more hopeful of a revival in the sector in the coming financial year.

HCL Technologies reported a 5.9% sequential growth in revenue from the July September quarter to $3.42 billion, and a 12.5% increase in net profit to $522 million. Its operating margin improved 1.3 percentage points to 19.8%. In comparison, Wipro’s lacklustre financial year continued with a 1.7% sequential decline in revenue to $2.67 billion on significant losses in its key business, including banking and financial services.

The company surprised on its net profit, though, posting $323.9 million, a 1.7% increase from the preceding three months. Its operating margin, though, fell by 10 basis points sequentially to 16% in the December quarter. A Bloomberg survey based on a poll of 25 analysts had projected net profit of $496 million on revenue of $3.37 billion for HCL Tech.

For Wipro, the average estimate, based on a poll of 22 analysts, was a net profit of $321 million on revenue of $2.65 billion. Based on projections by the IT companies and their performances in the first nine months of the financial year, HCL is on track to be the fastest growing of the top four. Although the company tempered the upper end of its projected margin, it maintained a guidance of 5 5.5%.

TCS is expected to follow HCL, having grown at 4.7% year on year until the December quarter. Infosys, which has so far grown at 2.5%, would be third. Wipro is expected to be the only one of the top four to report a revenue decline this financial year, after it projected fourth quarter revenue to change between 1.5% and 0.5%—thus suggesting that its FY24 revenue could decline by 3.7 4.1% over FY23.

TCS does not offer a revenue projection. “While we still don’t see an uptick in discretionary spends—it remains what it was in the last quarter... cloud migration, SAP Core and data modernization, cyber security, automation and advanced analytics are areas where tech spending will remain robust and resilient in the last quarter of this financial year," said C.

Vijayakumar, chief executive and managing director of HCL Technologies. Wipro’s chief executive Thierry Delaporte offered a less enthusiastic projection. “The demand environment remains cautious. Clients are making conservative investments," he said. “When the market turns, consulting will be the first business to bounce back.

(But) the market hasn’t changed dramatically, and continues to be what we’ve seen last quarter where there was a significant reduction of discretionary spend." On 11 January, TCS reported a 1% sequential growth in revenue and 2.7% increase in net profit for the December quarter. Infosys’s revenue declined by 1.2% from the September quarter, and its net profit by 2.3%.

HCL Tech’s growth in the December quarter came on the back of a boost in its software and services division, which received a shot in the arm from a $2.1 billion deal it signed with US networking major Verizon in August. Other deals, including its software collaboration agreement with Amazon Web Services, are said to have strengthened its business significantly.

As for Wipro, analysts are more optimistic than Delaporte. A better billing environment from already signed deals, and a better than expected quarter in its consulting business, helped it edge past market projections for the December quarter, they said. A senior analyst with a Mumbai based brokerage said HCL Technologies is poised for a stronger 2024 than its peers owing to its manufacturing and engineering focus.

“This can help the company mitigate uncertainties in software driven tech spending, which may improve in the coming year—but could be a hit or a miss," the analyst said, requested anonymity. Wipro’s future, too, appears promising given its “solid business pipeline", said Biswajit Maity, senior principal analyst at Gartner.

“The company has a strong vision and transformation capability, which influences client satisfaction." Wipro’s net headcount declined by 4,473 employees in the October December period, while HCL Technologies reported a net addition of 3,617 employees. This makes HCL the only one of the top four IT companies to have reported a net headcount addition for the quarter.

Wipro, TCS and Infosys, combined, decreased their net employee count by 16,254 during the December quarter. This causes some concern for India’s job market, considering the $245 billion IT services industry is one of the biggest recruiters for tech talent across India’s engineering institutions.

“Enterprises are prioritising operational cost improvements as well as low code capabilities that boost efficiency. We see great potential in generative AI, but the programs in this segment will be small in the near term," said HCL’s CEO Vijayakumar. “We signed 31 deals in generative AI, but most of them are of sub $1 million ticket sizes.

We expect them to ramp up in the coming quarters." HCL’s annual recurring revenue grew 2.9% year on year to reach $1.06 billion in the December quarter. Its software business, which contributed around 12% of its overall revenue for the period, saw profitability rise sharply to 32.9%. To be sure, while the December quarter is seasonally weak due to holidays and furloughs, the software business typically has a robust performance in every December quarter driven by enterprise software contract renewals.

HCL’s telecom business, which was in focus after its Verizon deal in August, saw a 25.9% sequential growth in revenue. Net new deals on a year to date basis grew 10% annually to $7.5 billion. Wipro, meanwhile, saw revenue from its banking and financial services business, its largest contributor, decline 4.3% sequentially in constant currency terms.

Wipro also did not sign any increase in mega deals between October and December, with large deal bookings shrinking to $900 million—down 28.7% sequentially. The lack of new mega deals has been a key issue at the company, which saw Stephanie Trautman, its previous chief growth officer and head of large deals, exiting at the end of 2023 after failing to sign a single $1 billion plus deal over the past three years.

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