HCL Technologies Ltd

NSE:HCLTECH

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the HCL Technologies Limited Q4 FY '18 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. C. VijayaKumar, President and CEO, HCL Technologies Limited. Thank you, and over to you, sir.

[C. VijayaKumar, President & CEO]

Hi, everyone. Good evening, good afternoon, and good morning to all of you. Welcome to HCL Tech's fourth quarter earnings presentation, which also covers the annual results for FY '18. Today, I'm joined by several members of the HCL leadership team, some of them in the room and some of them on the call.So let me get started. In terms of an overall financial summary for FY '18, from a revenue perspective, we grew 12.4% year-on-year, and for the quarter ended, 31st March, we grew 2.5%. From a constant currency perspective, it's a 10.5% revenue growth and a 1.2% revenue growth on a sequential basis. Our EBIT margin for the full year came in at 19.7% and for the quarter ended 31st March, it came in at 19.6%.Overall, this has been the second consecutive year of consistent execution of our overall strategy. We have met our guidance on the revenue and margin for the -- for all the years. So we feel very satisfied with our overall performance. It's also signified by some important milestones. We crossed run rate of $2 billion in quarterly revenues and, for the first time, HCL crossed INR 50,000 crores in revenue in this year.Overall, we are happy that we have ended the year with industry-leading growth, meeting our guidance on revenue and margins.If you look at our performance trends over the last 5 years, a fairly consistent performance, with the AGR of 11.5% in terms of revenue, while the headcount grew 7.3%, continuing to demonstrate significant nonlinearity in our business model. And this has been further accelerated in the last 2 years, driven by our Mode 2 and Mode 3 services. We've had a consistent growth in EBIT, and an even greater growth in our net income, really focused on continuing a stable and a profitable growth trajectory in our business.If we look at the performance in different segments for the last year and the last fiscal, the growth has been consistent and broad based. Some of the real highlights are 13.3% industry-leading growth in Financial Services. A lot of this was enabled by digital services, both in our existing clients and in new clients. A lot of our customers are looking at us as a disruptive service provider and are looking at replacing some of the traditional providers with our offerings. The growth has been fairly circular in most other verticals in FY '18, healthy growth across all geographies, led by U.S., close to 14% year-on-year growth. Engineering and R&D services grew at 37.6%, enabled by all 3 dimensions, which is organic growth, IP partnerships and acquisitions.During the year, we reorganized our sales organization, a part of which was already vertical led from a go-to-market perspective. Now we have completed the reorganization across the board. HCL sales teams, all the IT services, are now organized by vertical. And this is primarily done to address the market opportunity on Mode 1, Mode 2 and Mode 3 in a much more cohesive manner, and we expect this to enable a good momentum that has already progressed in the Mode 2 and Mode 3 businesses.Moving on, just a snapshot of how we have performed over the last 3 years in terms of our Mode 1-2-3 strategy. In FY '16, we had 15.9% of revenue coming in from Mode 2 and 3. It increased to 18.6%. And in FY '18, it came in at 23.4%. Our Mode 2 revenues grew 29.4% year-on-year in FY '18 and Mode 3 grew 68.3%. And the combined Mode 2 and 3 services grew by 41.5%. So we believe our Mode 1-2-3 strategy is continuing to make considerable progress and the results are very visible by the growth metrics. We signed 15 transformational deals in Q4, it consisted of all our services, geographies and verticals. For the year, we signed about 63 transformational deals. As we had indicated earlier, we are seeing a strong increase in the number of deals and the deal sizes in our Mode 2 services. And just an indicator metric, there are 26 customers in Mode 2 with revenues greater than $10 million in FY '18, together contributing to 49% of Mode 2 revenues.In Mode 3, we continued our initiatives. We launched the first wave of managed services addition of some of the products, apart from adding several products to our portfolio through a mix of homegrown organic IP acquisitions as well as IP partnerships. Moving on, a quick view of how our client partnership program has progressed. We have demonstrated significant growth in our top 5, top 10 and top 20 clients. This has happened across different geographies and verticals. We continually increase our wallet share for many customers, where some of the traditional programs are being optimized and the spend is -- are being diverted into some of the next-generation services. So this is clearly a stronger success metric, and we continuously track this to see how we can fine tune and continue to improvise on our client partner program. I want to cover a couple of inorganic updates. The first one is C3i, and the strategic rationale is pretty similar to what we shared earlier. C3i is a leader in customer engagement services in life sciences and consumer packaged goods industries. They have very special capabilities in clinical, pharmacovigilance and pharma sales support domains. And we believe HCL's Mode 2 digital capability, combined with C3i's depth to be more patient-centric will help us to offer services to IT as well as business stakeholders to improve health care outcomes. I think one very strong strategic rationale is our ability to access business stakeholders and several client organization in addition to the CIO organization was one of the prime drivers. The second element was also to -- we've had -- this has given us access to a lot more pharmaceutical clients and a few select top-leading brands in the CPG industries.As we had disclosed, the revenues of this organization has been coming down in the last 3 years at approximately a 10% decline rate. So in our outlook for FY '19, we have factored in a decline of about 10% to 12%. We believe there are good opportunities to grow these services. We expect the growth momentum to pick up in FY '20.In the current construct of C3i are due to the parent company. Several other pharmaceutical companies does not outsource work to this entity because of the competitive nature of the parent company with some of their businesses. We believe this will unlock some synergy and we will find some new growth opportunities. So we expect the growth to be coming in FY '20. The margins of this entity is very low, with an EBITDA margin of 6%. And the EBIT margin would be a couple of percentage points lower at this point. We expect the margins to reach HCL company-level margins in 3 years. This will happen by a combination of growth in revenues, which we think will happen in FY '20 and '21. And there are also significant cost-out opportunities which are there in some of the SG&A line items. All these together will contribute to improving margins for the next 3 years.On the next acquisition, Actian. Primarily, our focus and our strategic rationale for acquiring -- or signing a definitive agreement to acquire Actian is primarily our interest in the area of data. We believe hybrid data management is a very important area, and as more and more hybrid operating models come into place with some of the landscape on -- [indiscernible] landscape on the public cloud. So Actian owns several market-leading products as Actian Vector, Actian DataConnect and Actian X. Some of them are extremely rated highly from a performance perspective. We believe it enhances our Mode 3 offerings. And when combined with some of HCL's Mode 2 solution offerings, it offers a powerful proposition to harness the power of hybrid data.In terms of financial outlook, the regulatory approvals are in progress. We expect this to complete by August 2018. In terms of revenue trajectory, though it's been declining for the last 2 years, we expect the revenues to be stable because we are already seeing some growth in the second half of the FY '18, so we expect revenues to be stable in FY '19 and growth expected in FY '20.So now I will pass -- hand it over to Anil to provide some additional commentary on the financials for the past year.

[Anil Kumar Chanana, Chief Financial Officer]

Thank you. Thank you, Vijay. Hello, everyone. Good morning, good afternoon and good evening. So a quick recap on the performance. So a very strong quarter. We grew by 2.5% in [indiscernible] and this was on the back of a very strong quarter. The October to December quarter where we grew by 3.1%. We crossed $2 billion as a milestone on a quarterly revenue basis. In constant currency terms, we grew by 1.2%. We had a very strong client addition on a year-on-year basis. So there were 3 new clients added in the $50 million-plus category and 6 in the $40 million category, 9 in the $30 million category and 55 in $1 million-plus category. So strong client addition across categories.On an annualized basis, we grew by 12.4% year-on-year. And on a constant currency, it was 10.5%, as Vijay said, this was within the range, the guidance range we had explained. Going to the margins. The margins this quarter had been flat at 19.6%. There has been a variation in the margin between the service lines. The software services margin declined this quarter. Software services comprises of Application and Engineering Services. The Infrastructure margins improved this quarter as well as improvement in the BPO margins this quarter.The software services margin does affect -- comprise of both the Engineering margins as well as the Products and Platforms margin and Application business margin. There was an element of seasonality in the October through December period, when margins in the Products and Platforms business significantly increased because [indiscernible] renewals which happened in the quarter.So generally, if you look at the July to September quarter, the software services margin was at [ 20.3% ], it went up to [ 21.3% ] and in JFM quarter, it came to 19.5%. So one of the questions I got during the day was why is there variation? And this variation is due to the seasonality and also, to some extent, due to higher payroll taxes in the U.S., which normally hits in the first quarter of the calendar year and then move on from thereon. For a very similar reason, the SG&A also increased by 80 bps quarter-on-quarter, higher payroll taxes, higher [indiscernible] expenditure this quarter and certain legal and professional costs associated with the M&A activity which happened. On an annualized basis, with the margin -- on the margin side, we are within the guidance range of 19.5% to 20.5%. Our net income went up by 7.7%, while our revenues went up by 12.4%.With respect to the -- I've touched upon [indiscernible]. So while you see the net income growing by 7.7%, the earnings per share -- if I remove the impact of onetime tax benefit we got in the financial year '17, the earnings per share increased by 9.4%. There was about $46 million of benefit which came in the financial year '17. The return on equity stands at 25% plus, so very good return on equity.In terms of payout, I mean, we continue to [indiscernible] we'll be paying out 50% of the net income we have made, and this is what we had stated that we will be striving towards. With respect to the effective tax rate, we expect the tax rate in this FY '19 to be between 22% to 23%. With respect to hedging, there has been a good performance of hedging. For the full year, the net exchange hedge gain has been $83.5 million, which is more than [indiscernible] percent of the revenue. And this quarter, it was $24.6 million. We continue to follow [indiscernible] quota and we have mark-to-market gains of $26 million and the [indiscernible] maturity gains of close to [ $100 million ] in our balance sheet. Going further, in terms of cash flow generation, the net income to operating cash flow generation has been 123% in the full financial year. It was higher in this particular quarter, 143%.With respect to cash, we had EBITDA -- free cash flow to EBITDA ratio, this has been -- for this particular quarter, has been [ 80% ], while for the financial year, it has been 65%.A quick note on [indiscernible] asked a question whether we have done any IP deals this quarter and whether there's any payment relating to any new deals this quarter. There is no -- there has not been any new deals this quarter and no new payment has been recorded. [indiscernible] recorded as relating to the deals we had done the past year because these have been -- we have about $200 million-odd still payable against the deals which we had signed in the earlier quarter.We will be enhancing our disclosure going forward, and a couple of -- with respect to verticals, we will be making small change. We currently classify the manufacturing and high-tech together. We intend to probably align high-tech more with the telecom, media and technology, TMP segment, rather than the manufacturing segment because there is no synergy between the 2. So it will come as part of the Telecom, Media, Entertainment vertical. This, we will be sort of updating going forward. The other thing we will be doing is we will be providing you with Mode 1-2-3 revenues every quarter so that you can see the progress what we are making with respect to each of these modes or services we are offering to our customers. We will also -- we are also trying to work out, at a certain level, [indiscernible] gross margin level[Audio Gap]we're still trying to work out, through our [indiscernible] system, what is the data we can provide, and we'll come back to you on that.With the [indiscernible] disclosures which over a period of time have become [indiscernible] on things like banks [indiscernible] and facilitated the service we will be discussing. We will be engaging with you before sort of making changes to these disclosures during the quarter and then make the changes going forward.So one of the items I would like to touch is there had been questions during the day with respect to our guidance. And I would like to answer them. And to the extent I'm unable to answer, we can cover it in the Q&A going forward. And I will have to request Vijay to step in as I'm explaining here.So with respect to revenues, we expect our revenues to grow between 9.5% to 11.5%. This is using the average exchange rate for financial year '18. If I use the March end exchange rate, this works out to 10.5% to 12.5%. This includes both organic as well as inorganic contribution, which is likely to flow in this 9.5% to 11.5% range. There are 2 acquisitions which we have already announced, the acquisitions being the Actian and C3i. While we are doing this -- while we will be doing this acquisition, we also have -- last [indiscernible], we had informed you that India business, in there, we are [indiscernible] reducing our emphasis. And there will be a further decline in the India business which will be happening. So there will be a net-net [ software ] impact of both on the overall revenue. So there will be a positive flow which will happen from the new acquisitions which we have done and then there will be a negative so far as the India SI business [ reduction ] is concerned. There is also -- we did some acquisitions last year, which -- where the revenue benefited for the full year last year. So part of the benefit will flow into in this year. So net-net, we anticipate for whatever we have inorganic activity we have done so far or some effect of C3i acquisition and Actian acquisition. There will be a 400 basis point benefit which will grow.If I use the middle point of the range, which is 10.5%, and so 5.25% is supposed to be coming from organic and 5.25% is supposed to be coming from inorganic. So both effects will come from, as I explained, from Actian and C3i; and the last year acquisition, as adjusted for the decline in the SI business. So about 1.25% of the inorganic revenue, which are yet to come, for which we will [indiscernible] in the pipeline and which we will be further announcing as we are finalizing those things. And we are really confident that we will be [ raising ] that 5-point -- the mid -- I'm just making -- using that midpoint for this, which is 5.25% inorganic growth. This could be 4.5% to 6.25%, because it is the range we have given to you.In terms of margins, we expect our operating margin to be between 19.5% to 20.5%, which is the same margin range which we had sort of taken as a target last year. It assumes the currency at the average exchange rate for all the currencies, other than in the USD-INR, which is at INR 66 we have taken. And we have factored in the impact of C3i, which I just explained, which there will be some sort of -- the margins are bare minimum, and we will be improving the margins as we go forward. I have already sort of told you about the tax rate which will range between 22% to 23%. So this sort of gives a complete color on the guidance, and we'll be happy to take any questions as we move to the Q&A. Vijay, would you like to add something here?

[C. VijayaKumar, President & CEO]

Yes, I think you covered all elements. Maybe now I will request -- before we go to Q&A, we have a couple of more sections. We wanted to provide an update on a little more details on the progress that we are making in Mode 2 as well as Mode 3. So we will have Anand Birje talk about overall Mode 2 updates; followed by Darren and a quick HR update. After that, we will go into Q&A. Over to Anand.

[Anand Birje, Head of Digital & Analytics and Corporate VP]

Thank you, CVK. Good day, everyone. As CVK talked about earlier, this has been an inflection year for us the past year for the Mode 2 services. And I thought it might be appropriate to kind of recap something we had done 3 quarters ago, to help explain what Mode 2 services are comprised of and how they work in Enterprise Transformation, creating business outcomes for enterprises.So there's a slide that was kind of put together to demystify that. And we've always talked about digital and analytics, cloud, IoT and cybersecurity as those core pillars, the 4 services within our Mode 2 services, that are enabling enterprise digitalization. And if you look at it, really what it means is enterprises are rethinking their value chains, their business processes that are critical to be innovated upon so that they can business transform and stay sort of ahead of the market and compete in the market. And on these value chains, they are rethinking these value chains into a human-centric design, with user experience at the core to reimagine processes in these value chains, whether it's the user value chain, in how they interact with their users, the internal users, the external users and their consumers; their asset value chains, depending on the industry they're in; or their service value chains. And so user experience-based process rethinking is the core capability that we bring that is allowing us to work with enterprises on these value chains we think. But the enablement of these value chains is happening through our composable retail platforms that are getting built with API and microservices at the core; new technologies, such as AI and blockchain and virtual reality and augmented reality at the core.And really at the base of it, data as the fabric. CVK talked about our focus on data because the increasing importance of data as a foundation to digital transformations, both building data as a fabric and then really using insights from the data. Whether the data comes from the business operations or from the machines and things that are in the enterprise is a very important element of our analytic strategy. Obviously, we've always been a deeply involved [indiscernible] systems provider on the devices side, and so our IoT WoRKS capabilities are a very important element of our digital transformation, both in terms of integrating the devices in the value chains and getting insights and data from the devices in transforming these value chains. As digitalization is happening in the enterprise, the profiles and the security profiles of the enterprise are changing. And our focus on dynamic enterprise postures and creating new cybersecurity services for enterprises is an important element of digital transformations. And finally, the foundations of the enterprise are also transforming and moving from on-prem discrete infrastructure to cloud and cloud-like infrastructure or API infrastructure. And our cloud topology and Cloud Native Services are helping enterprises sort of rebuild their foundations as they digitalize their value chain. So again to recap, digital analytics, IoT WoRKS, Cloud Native Services and cybersecurity services are really becoming the pillars of our Mode 2 services in digital transformations of enterprises. Some of the commentary on Mode 2 have some detail in terms of where the growth came from and in what are we seeing in the market. As I said, a lot of the growth is coming by -- from 3 or 4 of these services coming together in helping enterprise creating those business outcomes, those digital transformations. CVK mentioned earlier, we had a fairly inflection and healthy last year, a 29.5% -- 29.4% growth year-on-year in these sets of services, led by Digital and Analytics. What is more important to us, we had extremely healthy wins, 40-plus wins across verticals, across geographies, across U.S., Europe and Asia Pacific geographies. And quite a lot of these wins came from net new customers, where were displacing traditional vendors who were providing traditional IT services in these customers. Another important aspect, and this is also a change that is happening in the market in the last few years, is the enterprise is moving away from digital programs and digital projects, to really ongoing scale digital partnerships. And so a sufficient amount of our experience in that area has helped us over the last few years, where almost 26 of our customers are in scale digital partnerships with us, where we're not just delivering projects for multiyear digital programs across digital, cloud, IoT and cybersecurity services. Some of the investments that we have made that we've talked about in the past but we wanted to highlight and give some color to that on the last slide, really. Both in terms of building new capabilities organically and building new technology and lab infrastructure that are very, very core elements of digital transformation that enterprises seek. We've invested over $100 million over the last 2 years in building a variety of labs across U.S., Europe and India, experience-centric labs for process redesign, IoT labs for sensors, transducers and IoT-ization of enterprise business processes, cloud native labs for our cloud-based modern app development and cloud transformation that enterprises are embarking upon.And then more specific labs like imaging and industrial design lab or cybersecurity labs that we've built across the markets. These labs are also places where enterprises are coming to do core innovation, prototyping, [indiscernible] with us in the start of their digital journeys or during their digital journeys. We also really [ robust-ized ] our capabilities in design and user experience, bringing in leaders, bringing in practitioners and subject matter experts from the industry who came from mainstream design agencies, from mainstream marketing transformation agencies across the world, and they have become critical elements of our design studios and digital labs across the world. With that, I'll hand it just back to CVK. Thank you.

[C. VijayaKumar, President & CEO]

Over to Darren for a quick update on Mode 3.

[Darren Oberst, Executive Vice President of Product & Platforms]

Great. Thank you, CVK. We thought, as we close the fiscal year and as we embark on a new one, it might be a good opportunity just to set the context on our Mode 3 strategy in terms of where we are and where we're going. There's been a lot of interest over the course of the last several quarters with all the activity that we've had in the market from various IP partnerships and acquisitions. And so we wanted to give just perhaps a broader view of how we're stitching together these various initiatives and investments into a much larger strategic transformation. So when you take a look at what are some of the key elements of the strategy and where are we looking to go, it is guided by a set of core principles. And first among those is that we see this as a long-term transformational play for HCL, really instilling IP DNA across the organization, whether it's within our Mode 1 and Mode 2 service offerings or in new products and assets that we'll be bringing to market directly. And it is a multipronged strategy with multiple ways to win. And this is very consistent with the way that we look to incubate new businesses throughout our history. It's both about diversifying risk. It's also a way that we can accelerate entrepreneurial energy, building capabilities both organically as well as through a whole series of inorganic activity and across multiple parts of HCL. Our commitment, and I think it is important to emphasize this, is we see this as a win, both in the short-term, something that has benefited HCL in FY '18, will be a benefit from both a revenue and profitability in FY '19; but really in terms of the long-term value. And the long-term value -- we'll get into in some of the details to follow -- but really how we start creating more transformational and new offerings for our customers and our partners. And then finally, I think on this slide, just wanted to emphasize the fact that it's not a single strategy. This is something we're looking at technical areas across all of HCL's service businesses, both in terms of horizontal technologies, areas that play to core competencies of ours, like IT automation, DevOps, Data and Analytics, legacy modernization, collaboration, security; but also in vertical solutions as well. Whether it's in the banking industry, telecom or in other vertical areas, these are areas where we're looking to harvest and develop organically and inorganically our key vertical solutions. In terms of some of the updates. We've highlighted in the discussions that preceded this, some of the investments that we've made, the new acquisition of Actian, we've also highlighted on a quarterly basis the IP partnerships. I think what I -- I just want to take a moment to emphasize, and you'll see that in the next couple of slides as well, are all the organic capabilities that we're building. And this is both capabilities that have existed within and across HCL, buried within our service practices, but also additional investments that we're making in building up the talent and skills and capabilities across the end-to-end software product value chain. Next, if you move on to the next slide, we wanted to give a slightly deeper view of this. And again, the key phrase that I would emphasize is multidimensional. We're not looking at this in a monolithic way. We're not looking at it as it's about IP partnerships or it's about acquisitions. We're really trying to think about this in a holistic way of how we can incubate and develop capabilities towards this long-term transformational vision around Mode 3. So I wanted to give you a view, perhaps, and just segment it into 3 major blocks.The first block is all the work that we've done in harvesting, developing and extending IP assets that has been created across HCL, whether it's in our infra practice around next-generation IT service management, within ERS and a lot of the capabilities around DevOps, testing excellence, application development practices, within our Application businesses, within our various protocols. Both harvesting, incubating, developing and investing in innovation assets. And we've been organizing this business under the overall framework of DRYiCE, where we have really leading-edge capabilities with a focus on next-generation service management and delivery, autonomics, lots of capabilities we've been building around AI, machine learning and how to really push the envelope for the next generation of IT and cloud automation. The second major sort of thread that I would highlight is the Products and Platforms capability, which houses today the major IP partnerships focused on 5 major areas, DevSecOps, really the integration of the application development toolchain with application security; automation; collaboration; mainframe and legacy modernization; and then data and marketing platforms. These are the 5 major core, proven scale products and platforms within this business unit. And really focused on a playbook that we've developed over the years within HCL of energize, modernize and innovate. And what we've seen through the course of the various IP partnerships that we've done is significant and concrete improvement, both in the underlying capabilities in the products and the associated revenue curve and value that customers are seeing from it. In conjunction with this, we've been building a lot of the wraparound capabilities that are fundamental to building a long-term successful product business, whether it's product management, product marketing, capabilities around UI and UX enhancement and building modern experiences around a product portfolio, cloud enablement, product sales and professional services.And then finally, the third major pillar here on the right is a whole series of investments and initiatives that we have across HCL. We've highlighted Actian in previous quarters. We highlighted acquisitions like Alpha Insight, Geometric, investments that we've made in leading start-ups like Moogsoft; some of the vertical software capabilities and IT partnerships associated with that. Again the key point I would emphasize here is we've been looking at how we can close, how we can incubate all of our service lines with Mode 3 offerings in IP-intensive businesses. I think the summary from this is what we see this a long-term strategy around future-proofing our business and, over time, building transformational solutions and capabilities across all of HCL.And then finally, I think, what we are going to be highlighting from the quarters to come are increasingly a lot of these proof points in terms of new capabilities that will bring it to clients as a result of these various initiatives. So if you move to the next slide, we just wanted to take a minute, and this is perhaps very high level, but we thought it was worth calling out and emphasizing. A lot of the enabling capabilities that we've been building, from an investor point of view, you've heard about an acquisition, you've heard about an IP partnership. But perhaps less visible is all of the connective tissue that we're building internally through hiring and developing of new talent and new skills into the organization. So a lot of the areas that we've been focused on in terms of initiatives are things like product packaging. It's product management, it's new innovative licensing models, it's building a lot of the capabilities to be a leading-edge product provider for the future.So a lot of these initiatives and a lot of these work are going to be coming to light over the course of the next several quarters. We just wanted to take a moment to perhaps cast a light on this in conjunction with a lot of the inorganic activities that have been featured more prominently. So with that, I'll turn things back over to CVK.

[C. VijayaKumar, President & CEO]

Yes. So following our few updates on [indiscernible] and then we'll go to Q&A [indiscernible].

[Unknown Executive]

Thanks, Rahul. Thanks, CVK. A quick update on the [indiscernible]. We highlighted [indiscernible] recently in terms of acquisition we executed in the last 12 months. We are at 15.2%, this is a good 140 basis points improvement over FY '17. Now our increasing employee-customer engagement is helping us. And the other thing is that the growth we have been seeing in those 3 areas. It requires [indiscernible], which we are not finding in the market [indiscernible] we are finding these coming at a very high cost. So to accelerate the deployment into the new range that we have, so we we've started [indiscernible] of designing program. And in FY '18, we have trained approximately 27,000 people and 90% of them are deployed gainfully in various engagements. And we continue to accelerate this program so that we can align with our growth aspirations and move to [indiscernible]. We also have embarked on a huge technology implementation of HR automation processes whether it's talent acquisition or talent development or talent management. So we -- to date, we have pretty much integrated our talent acquisition part. So from a requirement [indiscernible] onboarding, we have already processed that [indiscernible] increase the return more and probably come below [ 14 basis ] in terms of recruiting, which will help us in terms of accelerated acquisition of talent.So [indiscernible] process transformation and [indiscernible] transformation are the areas that we are focusing. As part of the [indiscernible], we took up a few major partners, improving the gender diversity and we [indiscernible] standard 24%, and we would like to continue this focus in the coming year. And U.S., we have been quite heavily focused in terms of the localization in various geographies with all the incumbent problems we have in [indiscernible] and these are across the globe. And the -- [indiscernible] we were able to increase our localization from 52% to 58%. And we expect this to grow further in FY '19. And the -- also automation what we are doing efficiencies, process streamlining, we continue to improve the [indiscernible] per employee, which has increased this by 5% to [ $69,000 ] in FY '17. So these are, briefly, some of the updates on HR and I'll pass it to CVK.

[C. VijayaKumar, President & CEO]

With that, sir, we can take question and answers. Over to you, operator.

[Operator]

[Operator Instructions] The first question is from the line of Ankur Rudra from CLSA.

[Ankur Rudra, Research Analyst]

Just a question on the performance and the guidance. The organic constant currency growth appears to have slowed down a bit over the course of FY '18 and especially the last 2 quarters. Your guidance does not appear to bake in any kind of acceleration in organic growth. I think you said 4.25% to 6.25%. Is there a reason for caution even though your client relevance appears to be improving and the success of your Mode 2 and Mode 3 strategies that you've been highlighting, if you can elaborate on that. And also specifically if you can highlight what is the drag from India baked in for FY '19. What it was in FY '18 as well?

[C. VijayaKumar, President & CEO]

[indiscernible] India and [indiscernible].

[Unknown Executive]

Sure, sir. So India is -- has been about, I would say, [indiscernible] percent in financial year '18. But it will come down, further come down because we are seeing this -- I mean, because of the bad debt we have not participated in the [indiscernible]. I see that almost significantly further reducing there. So that is why [indiscernible].

[C. VijayaKumar, President & CEO]

So I think from an overall organic growth perspective, I'm inviting -- to continue to remain very positive about the traction in our Mode 2 and Mode 3 services as well as the traction in winning new logos in traditional services. We also have a large book of business, and there's renewals pipeline which is there. So basically at the level of [indiscernible] in the existing book of business is driven by the volume of renewal. So I think if you just factor that in, that's kind of -- it's a little bit account for some improvement. I mean, we factored a very similar levels of organic growth, accounting for some compression on the renewals based on the volume of renewals that is expected or even the renewals that happened in the last half of the last quarter. So all of that overall provides an outlook as Anil highlighted around the pipeline of that question -- organic growth in FY '19.

[Ankur Rudra, Research Analyst]

And in the foreseeable future, if you look at the next 2, 3 years, do you think it's fair to assume that, that level of compression will stay in your business? Or will that slow down or accelerate in terms of a headwind you face from the renewals?

[C. VijayaKumar, President & CEO]

Okay. Of course, we have not very precisely estimated the impact in FY '20 and '21. But just looking at my comments and overall the outlook of business and the -- it goes up to that extent, the pressure on renewals will be there. Because with every renewal, there is more expectation on productivity, more expectations on automation as to amount of cloud migration, not just in the infra business, but also in the software business, some applications moving to SaaS. All of that makes the renewals a little smaller, including new deals a little smaller. So I would say there will be a slight increase in this as we move forward. But I don't have a very precise estimation of this. This is just some [indiscernible] answer that I give you.

[Operator]

[Operator Instructions] The next question is from the line of Diviya Nagarajan from UBS.

[Diviya Nagarajan, Executive Director and Research Analyst]

My question effectivity -- what do you think about -- how do you think about longer term organic growth momentum for the company? Do you expect that these renewals, especially from the renewals start to ease, you should be able to get to a high single digit or possibly even [indiscernible] kind of growth rates now. If yes, which segment in particular will drive that growth? Or do you think that is now [indiscernible] continue to be certain reliance on M&A. How are you thinking about your [indiscernible] 3 or 5 [indiscernible]?

[C. VijayaKumar, President & CEO]

I think first is that we have done a very careful estimation of what is expected to happen in FY '19. I have not done a fearless forecast of FY '20 and '21, even longer term. But I think the true growth will accelerate only when our next-generation services are really going to be the growth drivers. In the traditional business, we will continue to gain new logos but the deal phases are becoming smaller. So I think the growth momentum in existing services, I don't see it accelerate in the near term. Maybe a marginal increase or a decrease, but the real growth is really expected to -- incremental growth will come from acceleration services.

[Operator]

The next question is from the line of Ashwin Mehta from Nomura.

[Ashwin Mehta, Executive Director of Research]

So CVK, just wanted to check in terms of we had earlier indicated that IMS would improve from 1H. Do we still stand by that expectation? And secondly, what exactly is driving the deceleration in terms of App Services, because our legacy exposure in App Services should already be lower compared to our peers?

[C. VijayaKumar, President & CEO]

So Ashwin, so first on the Infrastructure Services, I had highlighted that in H1, we will see a pick up in the growth. I think we favor the same commentary, depending on the deals that has closed in the second half of FY '18. I do believe in FY '18 it will -- FY '19, it will accelerate. But overall, India is going to create a little bit of dampening effect to the infra business probably in FY '19 to some extent, but after that, it will not be the case. So I'm not able to provide a very precise -- how much will infra business grow in FY '19, but it will definitely be better than FY '18 because we're seeing all the trends in line with the growth momentum, barring the fact that the deals are either becoming smaller, so that's kind of overall reduced the growth rates, but it will definitely be better than what we had in FY '18. From an application business perspective, I think there are 2, 3 elements, as I said, of the traditional application support, the component of that is fairly small, which is facing similar kind of dynamic like infrastructure business, more around automation and more on some applications moving to cloud. Our enterprise package, while we saw some growth as we continue to see some growth in -- on the cloud implementations, but traditional large implementations are not happening. So I think some growth in acceleration services. We're getting some -- getting offset by some of the -- some compression and large SAP-type of transformational programs, not happening as -- at the same level as it was in the earlier years.

[Ashwin Mehta, Executive Director of Research]

Okay. And just one small one for Anil. Anil, the license IPR gross carrying values seems to have gone down around 20-odd million. Wanted to check what is the reason for that?

[Anil Kumar Chanana, Chief Financial Officer]

It could be exchange, I mean, that's what I can think of. I don't have the exact numbers in front of me, but we can certainly talk offline. But exchange will always have an impact.

[Operator]

The next question is from the line of Ashish Chopra from Motilal Oswal.

[Ashish Chopra, Research Analyst]

CVK, just wanted to understand from you, I think, some of the examples that you've cited in the Mode 2 services and cloud native, the deals, particularly the -- referring to the 3 deals that you mentioned there. So could you just shed some light on what these existing IMS customers, which are now into the cloud native services? Or are you kind of gaining new customers as far as the IMS cloud business is concerned? And the second question around that was just in terms of the deal sizes, how do dynamics change. Not to know the sizes of these deals, but just to get a clearer understanding of an incumbent account, closing to cloud native services. What's the kind of compression or addition or -- that you are able to get when you are actually offering the migration to off workloads to the cloud?

[Anil Kumar Chanana, Chief Financial Officer]

Okay, sure. Let me take the cloud native services question. I think we announced 3 deals on Cloud Native Services, one was a professional services firm based in Europe. This was an existing client where we provided our data center services. So here, we are migrating the large part of the data center, maybe 70%, 60% of the data center to cloud. And for that component, it was approximately half in terms of the existing revenues to the new expected revenues. The next one was euro-based pharmaceutical company, which was an existing client, but a small part of the estate is moving. It's a large pharmaceutical company. So I think the impact of this migration would not be much. It's probably 11%, 15% of their estate, which we expect to migrate to the cloud. The next one, U.S.-based company. I don't have the exact details on this. I think it's a new client where we have met new client where we migrate to cloud migration.

[Ashish Chopra, Research Analyst]

Sure. And just one last one for me on IMS. So I think last year in the first quarter you had mentioned the impact of productivity benefits, so taking in a large deal like Volvo. Should we kind of bake that in our 1Q expectations for IMS? Or does that no longer have a material impact?

[C. VijayaKumar, President & CEO]

Not yet like in April, we have the same impact because last year in April, all April [indiscernible] quarter, we had a redemption, a year-on-year redemption as part of the overall program. That is exactly there in this year as well. Maybe the quantum is not the same as last year, it's a little lower, but it is there.

[Operator]

The next question is from the line of Ravi Menon from Elara Securities.

[Ravi Menon]

The first question is on Europe. In the wake of the Volvo deal are we expecting to see better traction probably higher win rates over there. That But this year's growth momentum over there still seems to be kind of slightly slower than we had anticipated. So anything subject to probably some of deal composition that we are seeing in Europe in the news?

[C. VijayaKumar, President & CEO]

Sorry, what was the question related to Volvo? I didn't get it.

[Ravi Menon]

Post Volvo, expecting that your win rates in Europe would go up and therefore we might see a better growth overall for Europe compared to Americas. But it seems like America has done way better than Europe. So is Europe's existing revenue kind of under pressure from renewals?

[C. VijayaKumar, President & CEO]

I think from a Europe perspective, I mean, last -- I mean in the second half of FY '18, we definitely saw the win momentum significantly increasing. The number of deals that we won in Europe in the second half of FY '18 is significantly higher. It's probably among -- it's among the highest. But the deal values are significantly smaller. So I think that's primarily because some of the large -- some of the clients by nature are smaller clients and also the new deals are coming in with the assumption of 30% or 40% of the cloud component as a part of the overall outsourcing deal. I think that's what is showing some weakness. But I expect FY '19, Europe will be better from an infrastructure perspective certainly than what it was in FY '18.

[Ravi Menon]

And secondly, you did talk in the last quarter about some synergy revenues starting to come through to services side from the IP deals, and I assume that should come in the Application Services. So should we expect to see slightly better growth in Application Services in FY '19?

[C. VijayaKumar, President & CEO]

Actually, Darren highlights a few wins that has happened. However, the revenue impact of that may be marginal. So Darren, do you want to highlight some of the services deals that we won in alignment with the overall IP partnerships.

[Darren Oberst, Executive Vice President of Product & Platforms]

Yes, I think, that's exactly right. So we're certainly seeing a good volume of customer uptake of product-related services. But in terms of the aggregate revenue impact, it's still relatively small. And you would see it at those stand-alone deals, so times going in and working with a customer around implementation, upgrade, training and integration. In some cases, some small managed services, where customers are looking for a host of solution or some form of premium support or custom development work, so you will see some of those as stand-alone deals. We also are beginning to see customers that are traditional Application Services or ASM customers of ours expanding and finding additional growth opportunity, to start bringing product-related professional services into those much larger ASM programs. So it certainly falls into both categories, but at least as of today, the aggregate revenue impact is still relatively small.

[Ravi Menon]

Right, just a follow-up, I can understand that the aggregate revenue impact and the deals are fairly small for some of the deals that you are taking out from some of the software deals taken on from large, I would say, software vendors also or system integrators. But for vertical specifics of pressure, will the deal sizes be much larger from a sales component, I mean?

[Darren Oberst, Executive Vice President of Product & Platforms]

I think in general that is true. With vertical applications and more business-oriented application, the deal sizes will be larger. I think with a lot of the more horizontal and infrastructure-oriented tools, the deals sizes you'll see more of them, but the relative size will be a lot more.

[Operator]

The next question is from the line of Sandeep Shah from CIMB.

[Sandeep Shah, Vice President]

CVK, I think, post the Q3 result, in many of the interview comments as well as earlier comments, you said that the FY '19 growth will be better than FY '18. But if we look at your guidance, it's actually been lower at the lower end versus what you grew in FY 2018. So what has changed post your last comment and giving the guidance despite you added 2 new acquisitions being announced post your Q3 results?

[C. VijayaKumar, President & CEO]

I think in terms of new deal wins and the momentum that we are seeing and the optimism, I continue to remain optimistic. But when you really factor in the existing book of the business and the impact of renewal, this is where we believe it will last. So that was the real basis of our guidance. But as we progress, we would continue to keep you updated on how we are doing on this.

[Sandeep Shah, Vice President]

Okay. And Anil, can you just once again clarify the guidance portion, which you actually given in the initial remarks in your presentation. Can you once again give us?

[Anil Kumar Chanana, Chief Financial Officer]

Sure, sure. So we were talking about the revenue guidance here. So the revenue guidance in constant currency terms is 9.5% to 11.5%. Picking up the middle of the range, it is 10.5%. We have the 2 acquisitions we have announced, which is the C3i, which is analytic [indiscernible] and Actian, which we are hoping will conclude by August this year. So we will have 7 months of revenue coming -- accruing from Actian. And then the other acquisitions, which were completed last year, in the course of the year, for which the residual benefit will be -- the full year benefit will go in this financial year. So all put together and the impact of India outside of plan, net-net 4% for the inorganic. So if I take 10.5 being the mid -- middle of the range, 5.25% just starting it exactly how, 5.25% is organic and 5.25% is inorganic. Also [indiscernible] percent [indiscernible] I do mean that [indiscernible] included [indiscernible] maybe assuming close [indiscernible]. And so we will be doing further -- we'll need further inorganic revenue of 1.25%. And the rest, which is 5.25% will be the organic growth. If I pick up the middle of the range, this will 4.5% -- 4.25% to 6.25%. So I'm just making it a more noncritical part of our focus. We'll be rounding out here and there, but this is what it looks like for us.

[C. VijayaKumar, President & CEO]

And to add to that, there are many assumptions that have gone into arriving at this guidance. I think at this point, you should take this as an overall kind of an estimation from a thumb-rule perspective since there's a lot of things such as an organic, inorganic, being some of the questions that we receive.

[Sandeep Shah, Vice President]

Okay. Okay. Just a follow-up. In terms of the IT investment, sir, this quarter there has not been any partnership announced. So how should we read in terms of the intent? Are we done in terms of the portfolio where we wanted to have those kind of an IT? Are we done with that? Or are we looking for more such kind of an investment? And second follow-up, CVK, if you just look at the growth of the stand-alone IPs, it would be [indiscernible]. So at the board level or at the company level, have you actually quantified the synergy benefits on an ongoing basis whether these investments are moving in the right direction or not? Because just for 2%, 3% or 4% kind of a growth such [indiscernible] to sales multiple of 3, 3.5x looks really expensive even with an IRR of 15%, 16% when they actually are all 3 investment in the digital companies, the growth could be upwards of 15%, 20%.

[C. VijayaKumar, President & CEO]

Sure. We continue to look for growth opportunities, inorganic opportunities in Mode 2 and Mode 3. It just so happened that last year, it was a little more -- a lot more skewed towards Mode 3. However, we remain very optimistic about some of the possibility in Mode 2 during this year. And in terms of overall business case, we have -- I mean, there are many products, different products drive different types of dynamics, and we have made those assumptions. And we believe, overall, I think we finish 6 quarters and some of the products, some of them 5, and we are tracking to the business case. But the best way to really look at or review an investment will be at least after a year of completion. So far the first 2 investments that we have made are, one, we are very close to the business case. And another one, we are much better than the business case. The second, I think the first question that you asked was, are you done with the IP investments? The answer is no. We -- as Darren explained, this is really a long-term transformational initiative that we have, both organic and inorganic IP as per acquisitions. So we continue to look for the right areas where we can invest in acquisitions as far as IP partnerships. So as and when we succeed, we will keep you updated.

[Operator]

The next question is from the line of [indiscernible] from [indiscernible].

[Unknown Analyst]

I have a question like in the R&D space, can you throw some light on your business in the R&D space in terms of your geography-based presence as well as your outlook on year end is based? And what are the verticals you are serving in the R&D space?

[C. VijayaKumar, President & CEO]

Yes. Again, GH, who's always on our call who heads our Engineering and R&D Services. GH, would you want to answer that?

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

Yes, so to answer in the first part of your question, today, we are mostly fixated towards North America in terms of geography presence. However, we do see good traction in Europe and we have a very strong presence in Japan. So these are the 3 geographies in which engineering services are present. Secondly, from a verticals perspective, I think we have very broad-based exposure direct from telecom to online to aerospace, medical devices. We are pretty much there. We take very good critical mass and the distribution now for our revenues are very decent across all industries, India and the states.

[Unknown Analyst]

Okay. Sir, one more question. Like in terms of [indiscernible] data policy, do you think that it might impact your revenue growth or business going forward?

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

We don't see any significant impact [indiscernible] policy here. We have been already hiring more locals as a part of our workforce, as part of the overall HCL's policy, so we don't see any impact, no.

[Operator]

Ladies and gentlemen, this was the last question for today. I now hand the conference over to Mr. C. VijayaKumar for his closing remarks. Over to you, sir.

[C. VijayaKumar, President & CEO]

Yes. Thank you. Overall, we've had a good year and, I think, we are very happy with the way we executed and the direction in which our businesses are moving, all the right metrics in terms of what we want to achieve, we are progressing. Organic and inorganic both remains a core part of our overall growth strategy. However, we are very committed to continue to maintain the return on capital employed as well as our margin profile.So with that, I remain -- continue to remain positive on what we can deliver in FY '19 in line with the guidance that we have provided. So we look forward to interacting with you through the year. And thank you very much for joining the call today.

[Operator]

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