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HCL Technologies Says Challenging To Expand Margin As Demand Grows

HCL Technologies eyes margin closer to the industry leaders’ in medium term but that may not be easy.

<div class="paragraphs"><p>(Photo:&nbsp;Isaac Smith/Unsplash)</p></div>
(Photo: Isaac Smith/Unsplash)

IT services firm HCL Technologies Ltd. eyes operating margin closer to the industry leaders’ but that may not be easy.

“It’s the new normal as our guidance for this year is 18-20%, next year hopefully it will be better,” Prateek Aggarwal, chief financial officer at the software services exporter, said in an exclusive interview with BQ Prime. “We have a band what we would like to hit. It would be more towards some of our market leaders. I don’t want to put it down in so many more numbers because it is certainly not what we want to glide towards, but in the medium term we certainly want to be closer to the market leader’s number.”

The Delhi-based company posted 18.9% EBIT margin in the fiscal ended March 2022 and guided for 18-20% for FY23. In comparison, India’s largest IT services firm, Tata Consultancy Services Ltd., reported operating margin of 24.96% in FY22. Infosys Ltd. posted 21.5% operating margin for FY22 and forecasts it at 21-23% for FY23.

But achieving the target, Aggarwal said, is not going to be easy in the current demand and supply environment. “One of the main metrics that we are focusing on, and in the last couple of years we have come a long way and some more distance to go, is hiring freshers.”

HCL Technologies had hired 5,900 freshers in FY19, which increased to 22,850 in FY22. This forms a little over 10% of the total employee base of 210,000—an increase of 40,000 over a year ago.

The company plans to take this up to 50,000-60,000 freshers in the next couple of years, doubling the proportion of freshers to its employee base. “We are midway in the journey.”HCL Technologies

<div class="paragraphs"><p>HCL Technologies CFO Prateek Aggarwal. (Photo: HCL Technologies)</p></div>

HCL Technologies CFO Prateek Aggarwal. (Photo: HCL Technologies)

Despite a significant increase in on-boarding of freshers, Aggarwal said it’s difficult to get margin flight as it doesn’t work in a high-growth environment.

There are always a lot of initial costs at the beginning of any project. There are initial costs on hiring, training and transitioning. It could take three-six months to ramp up any project, and revenue doesn’t start from day one, he said.

In a high-growth environment, there’s typically pressure on margin as well. HCL Tech’s services growth is the highest among the large-cap peers, and that’s affecting the margin as well, Aggarwal said.

The company has reported a compounded quarterly growth rate of 5.2% in the last three quarters—that’s growing at 5% sequentially for the last three quarters—on the services side, and that’s creating a challenge in getting talent to ramp-up projects faster. Like other peers, it’s also grappling with high-cost lateral hiring.

“Even the people we have, we are doing everything we can to retain them and some of them do get fidgety in the musical chairs time frame that we are going through and cost (the company), which pulls down the margin,” Aggarwal said. “There’s a demand side which we are all pretty confident it will stay good for a couple of years. Its supply side is just the manifestation of same thing reflected back. So it’s linked. So long we will have a very good demand scenario I would expect supply to be challenging as well.”

And that, he said, is reflective in the attrition rate for the company. HCL Tech saw attrition at 21% for the last 12 months. Quarterly attrition on an annualised basis, according to him, has declined but is uncertain when this is expected to bottom out.

“We would like attrition to be in 10-15% range.” But by when he’s unsure.