HCL Technologies Ltd

NSE:HCLTECH

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to HCL Technologies Q3 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjay Mendiratta, Head, IR. Thank you, and over to you, sir.

[Sanjay Kumar Mendiratta, VP & Head of Investor Relations]

Thank you, Stanford. Good morning, and good evening, everyone. A very warm welcome to HCL Tech Quarter 3 Fiscal '21 Earnings Call. Trust you all are safe and healthy. We have with us Mr. C. VijayaKumar, President and Chief Executive Officer, HCL Technologies; Mr. Prateek Aggarwal, Chief Financial Officer; Anand Birje, Senior Corporate Vice President, Digital & Analytics and Head of Application Services; and Darren Oberst, Corporate Vice President, HCL Software; along with the broader leadership team to discuss the performance of the company during the quarter, followed by Q&A. In the course of this call, certain statements that will be made are forward-looking, which involve a number of risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those in such forward-looking statements. All forward-looking statements made herein are based on information presently available to the management, and the company does not undertake to update any forward-looking statements that may be made in the course of this call. In this regard, please do review the safe harbor statements in the formal investor release document and all the factors that can cause the difference. Thank you, and over to you, CVK.

[C. VijayaKumar, President & CEO]

Thank you, Sanjay. Good morning, good afternoon, and good evening, everyone. I hope the year has started off on a great note for all of you, and all of you are doing well. For HCLites, this year starts with a very significant milestone. As you've heard, in calendar year 2020, we crossed the $10 billion revenue milestone. This is an important milestone for us as a company. And it's a result of our vision, our employees' passion and a very disciplined execution over the last many years, combined with the trust and confidence our clients plays in us every day. We are very thankful to all our stakeholders for this support over the years. While this is a great milestone, it does have significant market relevance, especially if you look at the ISG service provider rankings. They rank companies starting from the booming 15, breakthrough 15, building 15 and the big 15. Obviously, this includes managed services market and the as a service or the cloud providers. So we are -- we will now be in the big 15. And it does definitely give us some advantage in -- especially in markets and clients where we may not be present. Having said that, I want to get into the next set of information I want to share with you, which is very specific to the quarter. At a high level, the strategic bets that we made in the last several years continue to deliver outstanding results as it is reflected in our sequential revenue growth of 3.5% in constant currency and 4.4% in U.S. dollars. On a year-on-year basis, we delivered 1.1% CC revenue growth and 2.9% dollar revenue growth. Our EBIT margins went up by 130 basis points sequentially. It's at an all-time high -- 22 quarter high, which is 22.9%, which is higher than the higher end of our guidance, which was at 20% to 21%. Our net income, INR 3,982 crores, a 26.7% increase sequentially and 31.1% on a year-on-year basis. Higher net income is also due to lower tax provisions and a couple of other technicalities, which we will cover subsequently. Our attrition is at an all-time low. Employee attrition on an LTM basis stands at 10.2%. So this is a very healthy situation, even though we expect it to inch up a little bit in the coming quarters, primarily due to the very strong demand environment. From a booking perspective, we signed 13 transformational deals, all of which -- all but 1 you can read in our investor release document. The TCV that we signed is a 13% increase year-on-year compared to the December quarter in '19. Our pipeline remains very strong. We are very confident of further acceleration of bookings in the coming quarters. Our strong performance was led by our Digital, Cloud and Products and Platform businesses, which reflects the success of the many strategic investments and bets we've made over the years, including strong and unique ecosystem partnerships and constructs that we have set up with hyperscalers. This happened a couple of years back. And each one of them are very mature, very cohesive operating units, which is working across the organization to drive and harness the momentum delivered through the -- in partnership with the cloud hyperscalers. The second important thing is the organic and inorganic investments we've made to build broad-based IP and Products and Platform portfolio is a very important element. It's not just the inorganic investments that we made, but what we have done with those investments, the R&D investments that we have made to innovate and launch products, which are very relevant for our clients, is what is driving the success of our products business. And the third very important reason for this strong performance is our digital transformation value proposition. It's truly differentiated. It's integrated, and it is resonating extremely well with our clients. If you look at the growth drivers, I would like to talk about it on 4 dimensions or 4 broad reasons, which is driving the growth. First is the overall buying temperature in the market is -- the demand environment is very strong. We are witnessing steady momentum in the market. Pent-up demand in some of the most impacted sectors like manufacturing and retail is slowly returning. While the sectors that were least impacted or, in fact, benefiting from the pandemic, like grocery and food distribution, life sciences and health care, the clients in these segments are making bolder bets and further evolving their business models and strengthening their business models using latest technologies. In this quarter, you saw a clear reflection of these trends as 5 of the 7 verticals showed a positive momentum. Media and telecom, which posted 12% Q-o-Q in constant currency, a substantial part of it is due to a onetime deal activity. So do not extrapolate this into any major trend. Tech services grew 6.8% sequentially. Manufacturing has returned to a strong positive quarterly -- I mean sequential growth of 5.6% in constant currency, which can be attributed to the new ramp-ups that I talked about briefly earlier. The second factor driving the demand, as I said, is the Mode 2 businesses. Particularly, digital and cloud are growing very aggressively, as companies are modernizing their core processes for differentiation, speed to market, efficiency and scalability. Our results reflect the success of the strategic investments we've made over the years, including IP incubation in our cloud and digital service offerings, the integrated value propositions and unique ecosystem constructs with all hyperscalers. We were one of the first in the market to create dedicated business units for the large hyperscalers. We did this 2 years back, and these are mature units in the HCL ecosystem. Major part of the growth came from the performance of our Mode 2 businesses, which delivered a 10.9% sequential growth in constant currency and a 25% year-on-year growth in the constant currency. We signed several large deals in digital and cloud businesses this quarter, like the one with the leading U.S. financial services firm, to build a customer-centric digital banking platform, leveraging the cloud technologies. Among other things, our solution here will enable the firm to offer a market-leading product portfolio delivered digitally by harnessing the most innovative low-code, no-code platforms, thus giving it a clear competitive advantage. Similarly, a Europe-based life sciences and health care company selected HCL as its preferred digital transformation partner for bottom-up transformation. Later in this call, Anand Birje, who leads our Digital and Analytics business, will provide more examples and highlights of the type of work that we are doing, what is differentiating us and the business outcomes that we are delivering for our clients. And Darren, who heads our HCL Software business, will also weigh in on the HCL Software business, which really brings me to the third dimension of the growth driver, which is the Products and Platform business, which grew by 9.3% in constant currency year-on-year, which is a very strong growth. It continues to validate our strategy. We have a very strong business model and an implacable execution rigor in this business, which is delivering some outstanding results. In this quarter, we had very high TCV booking, almost triple-digit increase in the TCV compared to the O&D quarter in 2019. And Darren will talk about some more details about how we are seeing this business and our performance in the last quarter. The last growth driver is the most important thing. This is the trust and depth of our client relationships. We signed a lot of renewals, and many renewals had new scopes with our existing clients in this quarter. In the increased uncertainty mix created by COVID, our clients benefited significantly from the flexibility, trust and support we offered, driven by our relationship beyond the contract philosophy, which has further motivated them to make bigger bets on us. A leading Europe-based global manufacturing company, for example, significantly expanded its partnership with HCL in Q3. In almost a decade of relationship with the client, we have helped them in managing and transforming their IT infrastructure landscape. Now they have asked us to help them with the multi-cloud transformation program. Similarly, a large pharma company and a large bank, both in the U.S., they have decided to bring us on for completely new services. So in summary, our strong pipeline and good order book keeps me very optimistic about our growth trajectory moving forward. I strongly believe we have a uniquely differentiated value proposition in the market through our combination of solutions and services and strong client relationships and the digital thought leadership and the entrepreneurial DNA. All of this will help us gain significantly from the increased market activity and the momentum that we are seeing. With that, I will hand it over to Prateek to provide more financial details and commentary. Over to you, Prateek?

[Prateek Aggarwal, Chief Financial Officer]

Thanks, Vijay. Good evening, everybody. Good morning to the ones in the U.S. Happy New Year, and I hope all of you are keeping safe and doing well. So to catch up on some of the financial highlights, the biggest highlight, of course, for the quarter and for the year is the $10 billion milestone, which we have achieved in the last 12 months in calendar year 2020. Moving on to the quarter itself, the quarterly revenue came in at $2.6 billion, which was a growth of 4.4% on a sequential basis and 2.9% year-on-year in dollar terms. In constant currency, it was at 3.5% sequentially and 1.1% on a year-on-year basis. As far as pre-COVID peaks are concerned, 2 out of 3 segments, which is ITBS, IT and Business Services, as well as Products and Platforms, are already above the peak that we hit in the March quarter of 2020. ERS is the 1 which is a little behind and hopefully would catch up soon. In the profit -- P&L accounts, EBITDA for the quarter in IFRS or Ind AS terms stands at 29.1%, which is up 157 basis points sequentially and close to 360 basis points year-on-year. The reason I call out EBITDA is because that, as you know, is the closest in terms of cash profits and reflects more the cash-generating ability of the business. Moving on to the EBIT. EBIT came in at 22.9% this quarter, which was up by about 130 basis points Q-on-Q and about 265 basis points on a year-on-year basis. To give you a quick walk on a quarter-on-quarter basis, we had the wage hike impact of about 50 basis points in this quarter. So the increase of 130 basis points was actually 180 basis points at a gross level. And some of the factors capturing -- or the source, where that came from, is -- first of all, the SG&A leverage. We also had some reversals in the provisions for bad debts because we could actually go and collect some of the things that we had, had to provide for in the earlier quarters. So SG&A leverage as a total gave us close to 80 basis points. And part of that was offset by the higher depreciation and amortization, giving a net benefit of 50 basis points. We were also helped by work moving more offshore and offshore margins being higher than on-site margins. It gave us about 50 basis points on top. At the same time, there have been some revenue catch up, particularly in the Mode 2 services and also in the ERS segment, which flew down to margin basically coming from previous quarters. And at the same time, in the last quarter, there was higher bonus payouts and provisions made in the last quarter. So that is kind of playing up the difference between the 2 quarters, September versus December. So that's the quick walk on the margin side. I will move on to the profit after tax, the net income at close to $540 million. In rupee terms, it is close to INR 4,000 crores, which is I believe the highest profit we have had in any quarter. And it is helped by, obviously, the solid growth that we have delivered, 3.5%, as well as the margins of 22.9%, but also helped by a couple of decisions that came our way. It has been a very productive quarter from a tax team point of view, where the tax expense of the quarter is kind of half of what it would have been otherwise, but for these 2 factors. And the first factor is reversal of a provision for an uncertain tax position, which had been set up in the prior years. And now, because of a certain judgment, we could reverse that provision, and it is kind of confirmed at a higher court level. The second factor is a more lasting kind of a benefit, which will sustain into future years as well. And that is giving us a reduction in the tax liability due to a very basic change in the method of calculating a tax exemption or tax deduction that we are eligible for, which is also as a result of some recent judicial rulings that came our way. So like I said, the second part is expected to sustain. And going forward, in Q4, our ETR, effective tax rate, will not be the usual 24%, which we were running in the last -- in the first half of the year. It will be more in the -- it will be sub-22%, maybe 21.5% to 22% kind of a range. And therefore, for the full year, financial year '21, the ETR would be in the -- it would be about 20%. So that is what has given us a solid leg up in terms of profit after tax or net income for the quarter. Moving on to -- then to the more cash flow and balance sheet kind of metrics. We are happy to have brought down the DSO, day sales outstanding, now down to 78 days, including unbilled revenue, which is 1 day lower than the 79 days that we achieved in the last quarter, which, as you might remember, was already a significant reduction of 7 days from the 86 days that we had at the end of March and June quarter. So compared to March and June quarters, 86. We are now down to 78 days, which is a solid reduction of 8 days. And this is despite some headwinds from the ForEx fluctuations, which actually decreased the DSOs on a stand-alone ceteris paribus basis. During the quarter, we generated an OCF, operating cash flow, of $684 million and a free cash flow of $621 million, both being 127% and 115%, respectively, of net income. Numbers to be proud of, I believe. And over the last 12 months of calendar year 2020, our OCF continues to be at a level of $2.7 billion and free cash flow at $2.4 billion. So these are the same levels that we achieved in the last quarter on an LTM basis, and we are happy to be sustaining that for one more quarter at virtually the same levels. And $2.7 billion is 150% of net income over the last 12 months. And free cash flow of $2.4 billion is 135% of the net income. As a result of all those cash flows coming in and the outflows, including the payment of $862 million to IBM over June and July, and also the dividends that we paid during the quarters, net cash is now at $2.2 billion, which is double of the same quarter last year, which was at $1.1 billion, and after paying off all those items that I mentioned. And even on a quarter-on-quarter basis, that's a solid increase of $375 million. That results in our last 12 months EPS at a level of INR 48.7, which is up by 26% on a year-on-year basis, calendar year '20 versus calendar year '19. And cash EPS on a last 12-month basis is now at INR 62.2, which is also up by a factor of 28%. The Board has announced or declared a dividend of INR 4 per share. This is as per what we had mentioned last quarter as well. So we are continuing with that. And the guidance for the quarter -- coming quarter is expected to grow. Revenue is expected to grow at about 2% to 3% in constant currency for Q4, which includes the DWS contribution and some expected seasonal downturn in the Products and Platforms segment. And EBIT, which we had earlier given the guidance of 20% to 21%, that has been now increased. The 21%, which was earlier, that higher end of the guidance, is now the lower end of the guidance. And the range now expected to be for the financial year is from 21% to 21.5%. I will stop there and hand over to Anand for his commentary on the Mode 2 and Digital businesses. Over to you, Anand?

[Anand Birje]

Thanks, Prateek. Good morning, good afternoon, good evening, everyone, and a very Happy New Year and wish you a healthy new year ahead. As CVK mentioned, we continue to see strong growth in our Mode 2 services due to our differentiated capabilities that we've invested in and scaled out over the last several years, specifically around digital consulting, helping enterprises reimagine their digital programs and then define the digital programs and prioritize and execute their digital programs through our consulting capabilities. Application modernization, both as enterprises, deliver these new digital programs and adopt cloud journeys. Application modernization plays a significant role in our participation and differentiation in the market. Data and analytics transformation, along with key ecosystem partnerships, both with the hyperscalers and also leading SaaS MarTech data platform, analytics leaders, et cetera, which all come together in conceptualizing, strategizing and then executing these programs. Enterprises across industries, B2B, B2B2C and B2C, have been investing in digital transformation over the years. But what we've definitely seen is a massive acceleration in their investments and rebalancing of the portfolio spend on what we would consider traditional business, as usual IT, versus digital transformation spend in the post-COVID world. Enterprises have accelerated almost multifold, bringing in these programs to the core to rapidly reinvent, survive and thrive in the net new normal. Value chains, such as CX, which includes customer engagement, partner engagement, employee engagement; omni-channel transformation, both online and offline commerce; supply chains, including planning, logistics, last-mile delivery; new products and ability to launch into products in new markets faster and many other aspects of value chains that are industry-specific are getting reimagined and transformed rapidly across the world and across industries. Our experiences in translating these transformation programs from strategy into more programmatic journeys and executable journeys, that are delivered in virtual Agile, program planning to delivery, and really having participated in such programs over the years and learned from those participations has really helped us win some of these new engagements and the growth that we see across markets. Customers are really putting premium on partners like us who have the ability to translate programs into prioritized road maps and execute these programs that bring together technology, design, process and domain consulting skills to execute rapidly with business and IT partnerships. We've also created over the years, what we call, Day 0 and Day 1 teams globally, which are really made up of digital strategy and technology transformation principles or architects that include application modernization, integration, data analytics and cloud capable, highly-skilled teams that are focused and embedded into some of our largest and key customers. And also, hence, bring domain knowledge, customer relevance in both conceptualizing and executing on these programs with our customers. At the same time, they are embedded into all the net new journeys with new customers right from solutioning into execution. I'll provide a little bit of color to the kind of programs we are seeing and the kind of transformations we are seeing. And I'll put it in the dimension of both value chains and verticals. Obviously, as I said, some of the value chains are cross-verticals. So if you take CX as a value chain, which is the most commonly occurring across multiple verticals, CVK mentioned one of the largest banking partnerships we did earlier this year, actually early in the quarter, which is a retail bank in North America, where they are really rethinking their entire value journeys in delivering their retail products and services to their customers, including core banking as well as home loans, auto loans and so on and so forth, and really rethinking their platforms on which they deliver their services. Modernizing these platforms using SaaS and cloud-native capabilities, building APIs to integrate with ecosystem partners that will bring new products and services, and delivering these at a time to market so that they can onboard members at 40% reduced time and also cross-sell products and services increased by 30% across their member bureaus. They're also acquiring rapidly across North America. And so their ability to integrate the acquired banks is going to be an important factor for the platforms that have been built and delivered. Similarly, one of the largest utility companies in Europe chose us as a partner to help them reimagine and transform their customer engagement, customer service and billing platforms, which are being really harmonized for content management, leveraging cloud, both for CRM as well as other aspects of functionality in the platform, using latest data integration as well as data analytics technologies; increasing customer communication, customer satisfaction and customer experience overall. This company is actually expanding rapidly and expects to go from 3 million to 30 million retail and B2B users over the next 3 years, as the platform is expected to onboard almost 300,000 new customers on to this over the next few quarters, rapidly increasing the usage and scalability of their business. Similarly, one of the world's largest wealth management and financial services firm is partnering with us in modernizing their wealth management platform as they see the demographics of their customers shift rapidly from U.S. and Europe-based predominantly to across Asia, Middle East, et cetera. And so they are trying to harmonize their platforms for user experience that is consistent across geographies. At the same time, build composability so that they can have country-specific and culture-specific needs tailored for advisory services, localized investments and investment plans and also broaden the customer base, both by geography and by net worth, increasing their overall revenue and EBIT 3x over the next 3 years. If I move to another sort of value chain that we are seeing, really getting transformed across industries, is omnichannel commerce, both in retail, but also increasingly in B2B industries like CPG, manufacturing, life sciences. We are seeing commerce modernization, especially in the post-COVID world, happening quite rapidly. One of the largest industrial tools manufacturing firms in the world partnered with us. And one of the journeys that we are embarked on with them is modernizing their B2B and B2C commerce value chains across the world, across 6 of their brands, as they are increasingly seeing direct-to-consumer business increased by almost 26% in this year alone, and they see that trend only increasing. So modernizing their B2C, at the same time harmonizing across brand their B2B platforms, leveraging UX and CX to increase commonality of experience, leveraging cloud for scalability and also leveraging API and microservices for modernizing these platforms, to increase overall adoption and the customer experience they want to deliver to direct to consumers commerce growth that is happening in their business. If I kind of go to core retail. Across the world, retailers are adopting to the new normal. One of the largest retailers in Asia Pacific partnered with us as they are in the post pandemic seeing a surge, both in online business as well as very different demand patterns and delivery and fulfillment patterns. And so the commerce modernization, omni-channel modernization as well as delivery modernization and what they call servitization is where they are launching their digital programs. And we're helping them with improving the overall time to market as well as customer experience, especially in the highly impacted customers that include elderly and customers impacted by COVID, creating features like on-call waiting online as well as creating urgent deliveries similar to prime deliveries for customers in need, et cetera, across the markets that they deliver to. I think supply chain is the third sort of value chain across industries that was already going through a big metamorph over the last years and has accelerated, including planning, warehouse management, logistics, last-mile deliveries, transportation. All of the aspects of supply chains are getting rethought of because both the demand patterns and how the customers are buying as well as the supplier patterns and the logistics and routing patterns are changing quite rapidly. For one of the largest CPG firms in North America, we have partnered to help them rethink their entire supply chain, specifically reducing their transportation costs by over 18% in the next year alone, as their last-mile deliveries, because of direct-to-consumer increase in their business, needs for them to change their fulfillment planning, their transportation logistics, their timetabling for their resources as well as trying to meet market demands for zero cost deliveries and so on and so forth is driving their digital programs. There are many other sort of aspects of transformation that include increased risk in fraud protections because of adoption of digital. As I said, one of the largest banks in Europe partnered with us, and we're continuing to modernize their KYC or know your customer platforms, as they see increase in both digital customer base and digital banking across the world. They are trying to harmonize fraud detection, using advanced analytics, using visual analytics as well as low-code, no-code platforms to fast rollout to necessary regulatory compliances within countries, essentially trying to meet all the compliance demands within the next 12 months as they see increase in the digital channels of banking. So those were some of the examples. As I said, we see this only increasing in acceleration over the next few quarters. We think we are very well positioned both due to our capabilities and, most importantly, the experiences that we bring to the table and have helped customers succeed in these journeys. With that, I'll hand this over back to CVK. And thank you, everyone.

[C. VijayaKumar, President & CEO]

Yes. Thank you, Anand. Maybe, Darren, if you could provide an overview of the HCL Software business, and then we will go into question and answers.

[Darren Oberst, Corporate Vice President of HCL Software]

Very good. Very good. Thank you, CVK, and good morning, and good evening, everyone. As CVK and Prateek highlighted, the third quarter was a strong quarter for the Products and Platforms segment. For all of you who've been following this business over a number of quarters, you may recall that it was 6 quarters ago that we closed on the significant divestiture transaction with IBM. And so very notably, the last 2 quarters, our third quarter and our second quarter, really were the 2 -- first 2 wrap-around quarters where we really started to have an operating baseline, and the baseline for comparison in terms of the growth rate of this business. And I think it's very heartening. And I think, in particular, the third quarter -- it was really a key milestone on the journey that we've been on with this business. So in terms of constant currency, it was 9.3% year-on-year growth in 3Q. And when you look at that 6-month period, these first 2 wrap-around quarters, the growth rate was in the 12% to 13% range year-on-year. In terms of how we've been performing against the business case, we continue to track favorably, especially in terms of the profit contribution that we expected. The business has proven to be a little bit more profitable than we thought it would be. And this is especially heartening in light of the environment that we've been working in, in terms of the pandemic. When we really think about the commentary of what have been the key drivers for these results, there are really 3 key items that I would call out. The first is just good, consistent execution against the strategy that we've articulated and quarter-after-quarter, step after step, customer after customer we've been delivering against. When we announced the divestiture, we've laid out a very ambitious road map in terms of modernizing and investing in innovation in each of these products. We've delivered on that. And as we've seen each of those new deliveries, it's had a direct impact on customer commitments to grow and invest in these products, on new customers and the competitiveness of these products in the market. And it's also led to things like very, very high and consistently improving Net Promoter Scores, as our customers appreciate and value the investments that we've made in the products. We've also focused on building out a global sales organization. And quite frankly, that takes time. And so again, quarter after quarter after quarter, the leadership, the management process, the pipeline build have continued to improve. And then finally, from a strategy point of view, we've really tried to get the little things right. And sometimes, those are the things that aren't as visible. But they're the kind of things of listening to customers, focusing on customer success, building a winning culture and making sure that, again, customer-by-customer you win that trust and you create that value. So that's probably the first thing underpinning, I think, the strong results that we've had this quarter. We've had a good strategy. We've executed on it pretty well. And this is just paying dividends from that strategy. I think the second thing then to call out is this was a very, very strong quarter for us in terms of new license bookings. What we have seen over the course of the last 3 quarters, through the COVID era, through our FY '21, is consistent and steady growth in our new license pipeline. And we've reaped a lot of the benefits of that in the December quarter. We would expect that. It is a seasonally strong quarter. But even when you compare it year-on-year, as CVK mentioned, we had over triple-digit year-on-year growth in new license bookings. We booked $91 million of new license booking TCV, which actually represents over 250% year-on-year growth. To share a couple of other key metrics and highlights in terms of the bookings for the quarter. We completed over 6,000 individual sales transactions that consist of both new license and renewals. A key metric that we track operationally are our new footprint wins. When a customer purchases a new product for the first time, we see that as a very important validation. We had 350 new footprint wins in the quarter, which is the most that we've had so far. Another key dimension in terms of bookings were just customer growth synergies that we've seen. And we've highlighted these anecdotally over the course of a number of calls. But we've seen it, I think, coming in multidimensions. The first, we've seen customers growing through existing software deployments, buying and committing to more of the product that they already have. We've also seen a significant amount of up-sell and cross-sell where customers expand the relationship then to work with us in other product categories. And then finally, and I think an area that we're really just scratching the surface, is starting to find that synergy where a customer that has one of our products starts to give us proprietary access and competitive advantage to really deliver very unique managed service offerings around it. We had 1 very important win in this quarter with a European customer where we had a large significant expansion from them on the software side, but it also led to a multiyear managed service partnership on the services side as well. Again, these are anecdotes, but we believe that this is just the beginning of a trend where we'll continue to find more growth synergy from our customers. The third key driver for this quarter, I think, really does speak to the mission-critical nature of these products, the underlying resilience of this business through the pandemic. While certainly we have seen headwinds like every other business in the world, we've also seen from many of our customers a counter, which is they see these products as more critical than ever in the types of digital journeys that Anand had just walked through. I mean so we believe, again, this is a great validation of the underlying business model, mission-critical products, high diversification in terms of major enterprises across all industries and across all geographies. We think it's a great underpinning of the fundamental hypothesis that we've had for this business. So those are really what we see in terms of the 3 key sort of growth drivers for this quarter. I did want to offer perhaps by way of a closing comment just how do we contextualize this performance. And a couple of the things we would say are, I think this is a good step in the journey. But I think it's important to realize that it is a journey, and this is a long-term commitment from HCL to really build a long-term, growing, very meaningful strategic software business. And we've just completed 2 wrap-around quarters. So it's still very early days. As Prateek mentioned, there is seasonality in this business, and we would expect that to continue. So almost every year, we're going to see a pretty strong cycle from the fiscal second quarter to third quarter and then seasonally weaker in the March quarter. That's just as many customers with December year ends deplete their CapEx budgets, and then, correspondingly, have less budget for new CapEx in the March quarter. So we would expect that seasonality to continue. We are also -- while we've completed most of the transition associated with the divestiture, there are still transition going on, and we would expect there to continue to be some onetime effects, both positive and negative, in any given quarter. And so 1 of the things we would encourage, what we look at, is the most important metric to track this business is that year-on-year growth trajectory of the business as measured over a number of quarters. One final point that I do want to mention, it's a positive, is that we actually are -- our new license pipeline today is actually larger than it was in the past quarter. So growth and momentum in the pipeline continued to grow. We see a lot of opportunity. And so we are continuing to invest in SG&A, continuing to hire our sales team in areas where we see more opportunity. As a result, though, we may expect slightly lower margins for this business over the course of the next few quarters as we're ramping up that sales team and as we're building pipeline. So with that, I'll close my comments and turn it back to CVK.

[C. VijayaKumar, President & CEO]

Thank you, Darren. With this, operator, please open it up for questions.

[Operator]

[Operator Instructions] The first question is from the line of Pankaj Kapoor from CLSA.

[Pankaj Kapoor, Research Analyst]

I have 2 questions. My first question is on the product business. So as a portfolio, they seems to be doing very well. I was just curious if all of them are growing at a similar pace or is there a difference in their trajectory. If you can give some color on that, that will be useful. And also, if you can correlate that with the investments we made in upgrading each of them. That is what I'm looking for.

[C. VijayaKumar, President & CEO]

Darren, do you want to respond to that?

[Darren Oberst, Corporate Vice President of HCL Software]

Sure. Thank you. So we have not, at this point, broken out or given specific guidance at a product level. I think in the future, again, as we start to have more consistent operational baselines, I think we'll be in a much better position to do that. I think right now, if we gave too much commentary, it might be based on a very limited number of data points. But what I would offer is that the investment that we've made was in every product that was in that acquired portfolio from IBM. And so far, we've seen good results across the board. Again, in any given quarter, like the quarter we just finished, certainly there were a couple of products that perform better than others. But I think across the board right now, we are seeing positive uplift and positive dynamics as a result of the investments that we've made in them.

[C. VijayaKumar, President & CEO]

I also want to add. While we have not done a very precise analysis of correlation to the investments to the growth, but we see numerous anecdotal evidences of features and functionalities which we've invested in, being adopted and accepted by customers. And that is creating some increased interest and momentum. See, we see a number of anecdotal examples, but it's too early to kind of really create a trend and communicate it.

[Pankaj Kapoor, Research Analyst]

Understand. My second question is for Prateek. Prateek, were there any one-offs in the margin performance as you hinted that? And if so, can you please quantify that? That is all from my side.

[Prateek Aggarwal, Chief Financial Officer]

Yes. So Pankaj, like I mentioned during my commentary, there was some degree of revenue catch up in the Mode 2 and ERA segments. That was -- roughly be around 40 basis points. So I believe that's what you are looking for.

[Operator]

[Operator Instructions] The next question is from the line of Sandip Agarwal from Edelweiss.

[Sandip Kumar Agarwal, Vice President]

Wish you a very Happy New Year, and stay healthy and stay safe. I would also like to congratulate the team for the excellent execution and robust results. So CVK, I have just one strategic question. If you compare the last 5 years for Indian tech industry and HCL, in particular, how do you see the next 5 years? I'm not asking for any quantitative data, but qualitative side. Do you think that there will be like much better reset or the times will be much better as you see today? And a related question to that is that if that is true, then if you go back a little bit in history and you see last year, FY '20, we ended at 10.7% constant currency growth for the full year. So we were already at a low double-digit trajectory before the pandemic. So will this pandemic, in that case, push up those numbers quite significantly? And I'm not looking for any quantitative number. I'm just looking at some qualitative comment around that.

[Prateek Aggarwal, Chief Financial Officer]

CVK, you may be on mute. We can't hear you.

[C. VijayaKumar, President & CEO]

Yes. Sorry, sorry. The simple answer is yes, Sandip. Several months back, I did mention in one of the analyst conference that the next 5 years will be seeing better growth for the industry than the past 5 years. And there is no reason why that's not true for HCL. And your observations about having a low single -- low -- I mean high single-digit growth over the last 4 or 5 years and the subsequent next few years will definitely see a better momentum. So you're absolutely right.

[Operator]

The next question is from the line of Kawaljeet Saluja from Kotak.

[Kawaljeet Saluja, Senior Executive Director & Head of Research]

Congrats on excellent margin performance. I have a couple of questions. My first question is on the large deals and the consequent correlation with growth. Now CVK, the last time you grew in double digits on an organic basis, it was helped by a significant number of mega deal events. Just wanted to know that is that -- a mega deal event is a precondition for you to return to a double-digit growth or whatever you're targeting as you move into FY 2022? And a related question to it is the fact that the market seems to be quite right for fairly large transformational deals, and competition is also quite active. But HCL has been unusually quiet. I just wanted to get your thoughts on this as well.

[C. VijayaKumar, President & CEO]

Yes. I think -- see, I mean, we've won 13 transformational deals, and we can only announce what our clients accept or allow us to announce. So that's one restriction that we have, Kawaljeet. And we are very strongly participating in a lot of large deals. The pipeline, at least 60% of the pipeline is filled with large opportunities, which are in a very well-qualified and an advanced stage. So I cannot really say anything more than that. The demand is -- pipeline is good. Our bookings will only accelerate. Now the first question, whether mega deals are a prerequisite for a double-digit growth? See, when we have mega deals, it does push up the growth by 2% or 3%. But I don't think that's a prerequisite. There are many years where we have grown well without a $1 billion deal, for example. So I do feel positive about multiple $200 million, $300 million deals, which are in the pipeline and which we continue to win. They will give us a good basis for a strong growth in the coming years.

[Kawaljeet Saluja, Senior Executive Director & Head of Research]

My second question is on ERS. Now since a while, for IT services, COVID has been a big accelerator for digital transformation and consequently hope of acceleration in spending. The trends for engineering services post-COVID is not clear. I just wanted high-level views on how would ERS change post COVID, let's say, over the next 3 to 5 years? How does the market for ERS services change?

[C. VijayaKumar, President & CEO]

Yes. I will provide a high-level view and request GH to kind of elaborate it a little bit. I mean, as -- Kawal, you know we have 2 components, asset-light industries and asset-heavy, and some of the challenges that we are seeing is in the asset-heavy industries. But the overall engineering now can be classified into traditional engineering and digital engineering, which is around IT/OT technologies and 5G and servitization, and some of these trends is what is going to drive the growth in engineering services. Maybe, GH, if you could elaborate that a little bit more?

[Gade Hanumantha Rao, President of Engineering and R&D Services]

Yes, sure, CVK. Before I go to the general comment, especially there is a good growth in engineering services, which we see as...

[Operator]

Excuse me. This is the operator. Sir, I'm sorry to interrupt, sir. Your voice is not coming in clear. Maybe we request you to use a handset, sir.

[Gade Hanumantha Rao, President of Engineering and R&D Services]

Okay. Is it better now?

[Operator]

Yes, sir, a little better.

[Gade Hanumantha Rao, President of Engineering and R&D Services]

Yes. So if you see engineering services, first of all, from a growth perspective, it has been growing very well. One reason why you may not see same result in the top line is because the growth has been mostly offshore-driven. So the reason why you see better bottom line improvements in our segment, maybe a little bit lower in the top line. So the growth has been fairly healthy. Secondly, as CVK mentioned, the engineering is going through a transformation that is more towards digital engineering, which is primarily led by various factors like software addition, 5G, analytics, all as a service model and similar products. This transformation is definitely giving impact to the growth in engineering services. At this point of time, there is a lot of growth in software engineering, the areas are telecom, networking, semiconductors, which are the industries, which have not been impacted by COVID that much. But if you take other industries, they're still yet to bounce back, the industries, especially in some of the manufacturing and aerospace. And once they start coming back, we expect the growth to be even better. So overall, we are doing well. We expect to do even better as the COVID impact is taken care.

[Operator]

The next question is from the line of Ankur Rudra from JPMorgan.

[Ankur Rudra, Research Analyst]

A great quarter, and thank you for the detailed color on the Mode 2 and Mode 3 business. CVK, you referenced a few times that your ecosystem partnership with hyperscalers is unique. Could you just elaborate on how you are unique? And how that's helping you in this acceleration to digital transformation and cloud migration?

[C. VijayaKumar, President & CEO]

Yes. Good question, Ankur. First is we were first off the bat to build the ecosystem-specific business units. And we -- for each of the ecosystems, we play in all the key layers. Because a lot of this cloud and hyperscaler ecosystem, while cloud migration is an important component, but there is a lot more value that can be created by leveraging the various functionalities of the cloud providers. And early in the game, we have been investing in certain accelerators and certain tools, which help in quicker migration, create quicker value from the cloud migration journeys, and also a very strong capability around financial operations once the clients move to cloud -- significantly cloud-enabled environment. So these are some examples. And with most cloud providers, we also have a very strong 360-degree partnership where we sell to them, we sell with them. So I think it's the strength of the partnership, the IPs and accelerators that we have and the early leads that we have with the ecosystem partners that truly differentiates us.

[Ankur Rudra, Research Analyst]

If I can get you a quick follow-up on the P&P business. I was just wondering if you could elaborate on the synergies or the extent of synergies you're beginning to get now. Is there a -- I mean could you -- when you think this would become material on services side? And also, given the very strong new license bookings, could you suggest if once we cover complete 2 years, what level of organic growth rate one should expect from this business?

[C. VijayaKumar, President & CEO]

Yes. Ankur, in terms of synergies, I think we can still only talk about it in an anecdotal manner. As Darren said, there are 2 broad areas trying to sell more products to the very large client base that we have. We are already seeing a significant synergy in that dimension. The second dimension would be trying to synergize between the software and services. In one of the large accounts that we signed in the December quarter, we signed a $30 million TCV services deal for supporting and build -- continuing to build on the software platform that we've sold to the client. So that's a great example. It continues to be a little bit patchy, but I expect to see that focus of cross-selling between services and software increase as we go forward.

[Ankur Rudra, Research Analyst]

The related question, also CVK, was on what kind of organic growth level should we expect after we complete 2 years? Is it like mid-single digits, high single digits? What are you targeting there?

[C. VijayaKumar, President & CEO]

Ankur, we -- it's still early days. We don't want to commit to a growth rate. But we will continue to give you a lot of leading indicators, like we gave you a commentary on the booking this quarter. We will continue to provide all the metrics, which are very typical for software companies. I think you should wait for at least the second year to be completed, so that we can really create a trend and extrapolation of this. But I'm very confident that it is a growth business. It's not going to deplete. The fundamentals of this business is very strong. The client interest is very strong. Customers are loving what we are doing. There is -- the mission-critical nature of these products are going to keep it very, very sticky, especially commerce, security, low-code, no-code platform and many other innovations that we brought. I would leave it there as a qualitative commentary, Ankur, at this point.

[Operator]

The next question is from the line of Prashant Kothari from Pictet.

[Prashant Kothari, Senior Investment Manager]

Congratulations on a good quarter. I had a question around large deals again. I mean we are seeing that many of the companies, which are probably not doing so well at the large deal front, have organized themselves differently now and are able to even better there. I just wanted to understand how we are organized internally? And is there any more work to be done on that front for us to have kind of better wins in the future? And maybe kind of a related question is that with many of our competitors kind of fixing all these issues around growth, around margins over kind of last few years, how do you see the competitive landscape out there? Would it be much more difficult going ahead to be kind of outperform the industry in terms of growth rates?

[C. VijayaKumar, President & CEO]

Yes. Prashant, in terms of large deals, there is no change in our operating structure. We have go-to-market teams, which is either verticalized in the U.S., and financial services is global and then geographic in Europe and Asia Pac. In each of these teams, there is a hunting team, which is the team which is focused on large deals. And our overall rhythm around large deals is very, very mature. The finance and various teams come together extremely well to play a large deal pursuits. So we don't see a need to do any changes. We've actually -- we are very good in large deals. And that momentum -- I'm pretty confident in the current structure it will continue. I don't plan to change anything there. Sorry, I missed your second question.

[Prashant Kothari, Senior Investment Manager]

Yes. The second question was -- I mean, we are seeing that a lot of your competitors are able to fix their issues. I mean, yes, so some had issues with winning large deals. Some had other Issues. But in general, we are seeing that these players have improved a lot versus what they were. And while HCL has been outperforming industry growth rates for a while now, do you think it will become much more difficult now just because the competition is also kind of caught up?

[C. VijayaKumar, President & CEO]

I mean I really cannot comment on that. I think a lot of it is dependent on the nature of deals. I mean if you do upfront rebadging of a large number of people, you have a different dynamics. If you transition in a logical way and build up your offshore capability, then it translates to a different revenue mechanisms. I think what you need to keep in mind is of the 6,600 net additions, 90% of these additions have been in the offshore. So usually, it is 80-20 or 75-25. So that also creates different dynamics from a growth perspective. So a lot of these factors play into it. It's just not about winning large deals. It does not necessarily directly translate to revenue. But they are really long-term value-creating opportunities.

[Operator]

The next question is from the line of Sandeep Shah from Equirus Securities.

[Sandeep Shah, Director of Research]

Just a question on production platform. If we say that the new license TCV booking at $91 million, which has grown at 250% year-over-year, is it fair to say the earlier base being as low as $26 million out of the total revenue size of, give and take, $630 million, $650 million, which was just 4% of the revenue? If you assume the tenure being just 12 months as a whole. Is it a right way? And is it fair to say that the license renewal business has been improving under the HCL Tech brand versus what it used to be earlier?

[C. VijayaKumar, President & CEO]

Yes. I think first is, these are net new licenses, what we talked about. It's not renewals. Renewals, we have not even called out. And these are quarterly numbers. So your numbers calculation is right. These are quarterly net new license wins. So your numbers are right.

[Sandeep Shah, Director of Research]

Okay. Okay. And just a question to Prateek. If I look at the full year EBIT margin guidance and arrive at the implied EBIT margin guidance for the fourth quarter, we are guiding for 19% to 21% EBIT margin versus our Q3 run rate being as big as 23%. So even at the upper end, we are looking at 200 bps Q-on-Q margin dip despite there would be savings through lower amortization as guided in the U.S. GAAP financials as well. So what is driving this? Is it conservative? Or is there some investments which are planned in the fourth quarter?

[Prateek Aggarwal, Chief Financial Officer]

So Sandeep, as I replied to Pankaj a little while back, there is a degree of catch-up that we had in this quarter. And he asked for the quantification, which I gave as 40 basis points. So in that sense, the 23% or 22.9% to be more precise comes down a little bit. And we are also conscious that we have a salary increment coming up next quarter. Part of it took place this quarter, which I quantified as 50 basis points. Next quarter is expected to be 80 to 90 basis points. So that really practically brings it down to the higher end of the range that you rightly calculated. So that's where the guidance is, and we'll wait to see what the quarter brings. We are just in the first 15% of the quarters, 85% still to go. And that's the realistic estimate of the quarter both from our top line and bottom line perspective that we have given in our guidance.

[Sandeep Shah, Director of Research]

Okay. And just a clarification. What is this 40 bps, which you catch up? I didn't get it correctly.

[Prateek Aggarwal, Chief Financial Officer]

There was some revenue, which we could not recognize for various set of reasons in the previous quarter results. And that got recognized in this quarter, and flows down to the bottom line.

[Operator]

The next question is from the line of Sudheer Guntupalli from ICICI Securities.

[Sudheer Guntupalli, Research Analyst]

The broader investor understanding at the center is that as and when travel and office resume, some of the onetime cost savings that HCL or industry in general has seen in FY '21 may unwind, be it travel or offshore, et cetera. But at least part of these savings can be extrapolated over the medium term. In that context, CVK, your press meet outlook of 20% to 21% EBIT margins in steady state, it's a little perplexing because it essentially indicates that we'll go back to pre-COVID margins, adjusted a little bit for product acquisitions. So I would be glad to know your thoughts. What are the puts and takes in a steady state, completely understanding that some of the time lines are still fluid and not in our hands?

[C. VijayaKumar, President & CEO]

Yes. Sudheer, see, I don't think we have done a very precise estimation of the margin dynamics in a post-COVID world. Of course, there are many variables. So I do want to just leave my commentary on margins in the longer-term or even midterm in a little more qualitative manner. As you called out, some of the travel and other costs will come back. Typically, one would assume there is a 2.5% benefit that we would have got due to reduction in some of these costs. I think about half of that would come back in a steady operating environment. The second important dynamics is the offshoring component is going to gradually increase. In fact, in the last year, basically O&D '19 to O&D '20, our offshore percentage mix has increased by 2.5%. So that will drive some improvements. But we are also in a market, which is seeing tremendous momentum in various geographies across the world. So there will be a need to invest a little bit ahead of time for some of the deals, and that may create a little bit of a headwind to margins. So these are the qualitative factors. From a pricing perspective, nothing unusual. It is pretty much similar dynamics as in the past. So these are the qualitative factors, but we have nearly not gotten to a very, very precise estimation. Possibly as we plan for the next year, we will get a better understanding. So our commentary of '20 to '21 was a very directional high-level view that we shared.

[Operator]

The next question is from the line of Girish Pai from Nirmal Bang.

[Girish Pai, Head of Research]

CVK, you mentioned that the next 5 is going to look stronger in terms of growth versus the last 5 years. Do you see this growth front-loaded in these 5 years? And specifically, I want to ask about this digital infrastructure part that -- the digital foundation part that you've been talking about. Do you see the demand for this compressed, say, the next 12, 24 months and then after that kind of weigh? That's question number one.

[C. VijayaKumar, President & CEO]

Yes. So I would not say that it is front loaded, especially the digital transformation -- digital foundation-led transformations. There is -- I mean even if you look at the hyperscalers, a lot of their booking does not translate into revenues quickly because there is the lead time in the whole migration process, which includes a significant amount of planning, a lot of associated infrastructure component, modernization, like network, security and things like that. And some of the process improvements that need to be put in place. So while large deals and large bookings happen, I think the translation of that into revenues would be gradual. So I would not say that it would be front loaded, at least from a digital foundation perspective. However, there could be a lot of cost transformation deals where you take over a lot of legacy landscape, including people transfer and some asset transfers, where you may find a little more traction due to the economic environment that we are seeing. That could create a little bit of an uptick. But what we are largely focused on is the long-term value creation and digital transformation programs, and that's going to be somewhat uniform, in my view, will scale up gradually over the years.

[Girish Pai, Head of Research]

One last question is regarding margins. Do you think structurally, you would be seeing higher margins, say, by 100, 150, 200 basis points from here on after what we've seen in FY '21?

[C. VijayaKumar, President & CEO]

I just answered this in the context of the question that Sudheer asked. I mean we've not done a very precise estimation of what the post-COVID margin scenario will be. But there are many qualitative factors, which will continue to be tailwinds from a margin perspective, the higher offshore content. And definitely, half of the savings due to all the travel restrictions would come back. So these are the 2 positive aspects. But there is also such a momentum in the market. This is also the time that we need to invest in the right areas. And especially, if you want to look at our Products and Platform business, it's seeing so much traction. The pipeline is good. So we will continue to look at it and invest in the sales and marketing efforts to really capture the market. So these are the few variables that are on our plate. We don't have a precise estimation. Maybe in the future quarters, we will try and quantify this for you.

[Operator]

The next question is from the line of Ashwin Mehta from AMBIT Capital.

[Ashwin Mehta, Research Analyst]

CVK, 2 questions. One is on the asset-heavy side of the R&D where we've seen some challenges. So are there opportunities here in terms of either captive carve-outs or some parts of the business being outsourced, which are now becoming, say, noncore for customers? So some of these cost save opportunities accelerating in this part, and how are we looking at that opportunity?

[C. VijayaKumar, President & CEO]

Yes, Ashwin. There are numerous opportunities for captive carve-outs, either India-based captives or even global captives. And we are participating in these programs. Some of that is in the asset-heavy industries as well. So not very different from the rest of the industries. And as GH said, we are already seeing the pickup in most segments. However, the pickup is a little bit more offshore-centric, so that would have its own revenue dynamics.

[Ashwin Mehta, Research Analyst]

Okay. Fair enough. The second question was in terms of the product business. So while we are selling to our 14,000 customers our own products, is there an opportunity to also sell products to some of the other vendors? So maybe partnerships like the Temenos MXDP deal. Are there more opportunities out there? And can this be a big opportunity over the next 3 to 5 years?

[C. VijayaKumar, President & CEO]

Darren, would you want to take that?

[Darren Oberst, Corporate Vice President of HCL Software]

Yes. So in short, I think there's a lot of opportunities to leverage an ecosystem, work with other software companies, other service providers that are in complementary areas. And absolutely, that's something that we'll pursue. But if the question is specifically around, call it, a resell business of third-party products, I think I could give a clear answer. The answer is no. That's not really an opportunity.

[Ashwin Mehta, Research Analyst]

Okay. Okay. And just one last small point from Prateek. Prateek, what would be the expected tax rate for FY '22?

[Prateek Aggarwal, Chief Financial Officer]

Ashwin, again, like the rest of the commentary, whether top line, bottom line, same goes for tax rate. I don't have a very precise number for you. But it would potentially be going up on a year-on-year basis simply because more of the tax-exempt units would go -- some more would go from 100% to 50% exemption and some 50% would go from 50% to 0%. So potentially, it would be around roughly about 23.5%, give or take -- percentage points. So maybe a range of 22.5% to 24.5% or thereabouts.

[Operator]

Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. C. VijayaKumar for closing comments.

[C. VijayaKumar, President & CEO]

Yes. So overall, we continue to feel very positive about the market momentum and differentiation. Our ability to win and execute is outstanding. And I personally feel very confident about harnessing this momentum and delivering value for all stakeholders. So thank you for joining the call and look forward to speaking to you in the coming interactions. Thank you, everyone.

[Operator]

Thank you very much, sir. Ladies and gentlemen, on behalf of HCL Technologies, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.