HCLTech reports fastest Q2 growth in five years, calls AI revenue in a first

India’s third-largest IT services company reported revenue growth of 2.8% sequentially to $3.64 billion—beating an estimate of $3.54 billion by a Bloomberg poll of 31 analysts. Its net profit also jumped 8% sequentially to $486 million in the quarter.

The company became the first among India’s biggest IT outsourcing companies to report revenue from advanced AI, $100 million in Q2.

Before HCLTech, Accenture was the only large IT outsourcer to call out revenue from AI. The world’s largest IT services company got $2.7 billion in revenue from the new technology, which is roughly a fifth of HCL’s total revenue last fiscal.

Notably, its growth trajectory is at odds with larger peer Tata Consultancy Services Ltd, which last Friday reported subdued second-quarter earnings, even as it made its biggest pivot by committing to invest upwards of $6 billion in data centres over five-seven years.

Much of HCLTech's growth in Q2 came from banks and financial institutions, which made up a fourth of the incremental revenue of $99 million. In terms of geography, much of the company’s incremental revenue came from the Americas, which fetched more than half of its business.

During HCLTech’s post-earnings media interaction on Monday, its top executive said the macro environment was largely unchanged. “Overall demand environment is more or less similar to what we saw in the last quarter," said C Vijayakumar, the company’s chief executive.

“I think discretionary spend in certain pockets is almost becoming mandatory," he said, adding that a lot of non-essential spending was being ploughed into AI.

HCLTech’s AI approach through its products and IP-led platforms is similar to Accenture Plc and in contrast to TCS, which is taking a hardware route through data centres.

TCS also differed in its interpretation of the demand environment. “Lingering uncertainties in the broader economic environment continue to remain a key challenge," the company’s chief executive and managing director, K. Krithivasan, said during the company’s post-earnings press conference on 9 October.

“Companies are keeping a tight control over their discretionary budgets in response to economic and demand volatility," Krithivasan said. “Clients are consolidating vendors to achieve transformation objectives effectively and efficiently." TCS ended the previous quarter with $7.47 billion in revenue, up 0.6% sequentially.

HCLTech’s guidance

HCLTech’s tempered outlook on the demand environment is reflected in its guidance. The company retained its revenue guidance of 3-5% in constant currency terms for the full year. Constant currency does not take currency fluctuations into account.

“We are raising our full-year services revenue guidance to 4-5% in constant currency from the earlier 3-5% in constant currency. Given the softness in the software segment, we are keeping the company-level guidance unchanged at 3-5% in constant currency," said Vijayakumar.

At least one analyst mirrored the company’s caution. “Revenue growth was better than our expectation," said Amit Chandra, vice-president for HDFC Securities. “The lower end of the services revenue guidance increase is good but that does not imply optimism."

Restructuring and layoffs

The management also threw light on the restructuring plan announced last quarter, as part of which facilities that were redundant would be shut off and employees that were not redeployable would be let go of.

“When you're trying to restructure, there will be some reductions, but those are all managed through the regular process that we go through," Ram Sundararajan, the company’s chief people officer, said during the post-earnings call.

However, the company added headcount of 3,489, ending the second quarter with 226,640 employees. This comes on the back of TCS cutting headcount by more than 19,000 in the same period. TCS announced its plans to cut 2% of its headcount, primarily in middle and higher-level roles, on 27 July.

To be sure, HCLTech was the only other large IT services company apart from TCS that called out workforce reduction last quarter, and that too before the latter. During the company’s post-earnings press conference in July, the management attributed workforce reductions to meet the company’s operating margin aspiration of up to 19%.

The company retained its operating margin guidance for the full year at 17-18%, and its profitability jumped 110 basis points to 17.4% in Q2, which the management attributed to the recovery plan outlined last quarter. The margins include a restructuring cost of 55 basis points. One basis point is a hundredth of a percentage point.

No data centre plans

During the post-earnings press conference, the company also dismissed plans of foraying into the data centre business like TCS did.

“From our perspective, we are very focused on two broad elements in AI. One is, of course, building intellectual property," said Vijayakumar, adding that “companies like Open AI and tech OEMs and hyperscalers, they're really investing and enhancing the intelligence layer. Now we see a tremendous opportunity to build IP to make that intelligence layer relevant and scalable for enterprises. This is where we are investing."

He added that the second element included the company’s physical and agentic AI solutions.

His commentary comes after TCS announced its intent to build AI data centres in the country, in a bid to make it the world’s largest AI-led technology services company. The company plans to invest upwards of $6 billion over the next five-seven years to construct and run a data centre with 1GW (gigawatt) capacity. Its management attributed this move to creating additional revenue streams from Gen AI.

HCLTech’s shares ended flat at ₹1,494.7 at the end of market hours on Monday. In contrast, the 30-share BSE Sensex index closed 0.2% lower at 82,327.05 points. The company’s earnings were announced after market hours.