HCL Technologies Ltd

NSE:HCLTECH

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the HCL Technologies Limited Q4 and Annual FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjay Mendiratta, Head of Investor Relations, HCL Technologies Limited. Thank you, and over to you, sir.

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

Good evening, and good morning, everyone, and welcome to HCL Technologies' Quarter 4 and Annual FY '20 Earnings discussion. We sincerely apologize for a delayed start to the call. Today, we have Mr. C. VijayaKumar, President and Chief Executive Officer, HCL Technologies; Mr. Prateek Aggarwal, Chief Financial Officer; and Mr. Apparao, Chief Head of Human Resources. I now hand over to Mr. C. VijayaKumar to take it forward. Thank you, sir.

[C. VijayaKumar, President & CEO]

Thank you, Sanjay. Good morning, and good evening to all of you. I trust all of you are well and safe. Today's presentation, we've structured into 3 parts. We will start with a -- I will start with a quick kind of overview of the year that went by in the quarter. After that Prateek will give us a little more drill-down of the financials. And then I will come back and give you an update on the demand environment and how we will be looking at the coming year. So let me get started with the performance summary for quarter 4 and fiscal '20. First, on the overall response to the global pandemic, we were one of the earliest to kickstart the business continuity planning. We started it on 26th of January. After we came to know about the first human-to-human transmission outside China, which happened on the 25th of January, within 24 hours, we had kickstarted. We, as a part of our risk management practices, we had a Chief Continuity Officer, a Pandemic Officer, all of them were pre-identified as a part of our risk and compliance practices. Now of course, the 3 dimensions in which we focused on. Of course, employees was the most important dimension of our COVID response. We took multiple steps to enable all of them to work from home. And we did that very early in the game, so there was very little impact from a supply side during the last quarter. As of today, 96% of our employees work from home, 2.5% work from offices by the [ heads of our ] global client locations. And 1.5% was the supply-driven billing loss. Even this loss has been mitigated significantly beginning this week. Obviously, this is a very unprecedented situation, so there is a significant amount of emphasis on engaging with our employees. We've set up a global pandemic health line, which is manned by doctors and nurses, who have been very helpful in providing all the information, support and very, very considered advice to our employees and their families. We've also introduced a flexible hour policy because we recognize that people working from home have to take into account many other aspects in this extraordinary situation. So this has been very well appreciated by our employees. So significant emphasis on digital engagement, whether it is engagement with the teams, engagement which is a little more fun and things like that have been fairly well received by our employees. So today, we are able to implement or work as if we are working from office with that level of interaction. And in fact, there is more interaction now than even when people were working from offices. In terms of clients, of course, which was again a very important focus. Just to highlight, while our internal technology teams transitioned 150,000 employees to a work-from-home model. Our employees in the infrastructure business largely enabled over 3.5 million client employees to work from home. This is through multiple means and taking into account multiple security protocols. And so it was a phenomenal effort, and our clients have been hugely appreciative and have been continuously reaching out and emphasizing how important was the support that we provided and how much we value our relationship. We also did a survey, which was part of our annual survey. We added another question how effective was our response. 99% of our client respondents rated our response as very effective or effective, pardon the typo on the slide. And a lot of what we do, whether it is in the health care provider segment or supporting utilities, supporting many critical segments, we are delivering mission-critical services. For example, in life sciences and health care, we have had numerous requests to scale up our clinical trial environment. A lot of the patient-facing applications we have been asked to enhance capacity. In fact, our team set up several hospitals as a part of 3 major hospital chains that we support, temporary hospitals with very robust infrastructure that we set up during this time. Of course, but not last, but least overall, the community has been a focus of HCL Corporation and HCL Tech are very thoughtfully contributing to what we can do to demonstrate or deliver some on-ground meaningful impact like setting up a pandemic command center for [ Madras or Chennai ] disaster management data analytics centered in Chennai, and similar things like supporting the health care workers with the PPE, ventilators to hospitals and many other things. Just give me a minute, I think I caught [ now the decks is ] -- I'm back. Just moving on to the numbers per se. As you would have seen, we delivered a good quarter of growth in constant currency was 0.8%. There was possibly a very small impact due to COVID in this. So otherwise, it would have been a little more. Our revenues on the actual currency came in at $2.543 billion, which is 11.7% increase year-on-year. Our EBIT was one of the highest in the last 5 years. We delivered 20.9% EBIT, which is a 63 basis points increase over the last quarter and 174 basis point increase over the last year for the same quarter. And this 0.8% quarter-on-quarter growth came on back of a 2.1% Q-o-Q in the Q3 in constant currency terms. Overall, revenue came in at $9.936 billion, 15.1% growth, which translates to 16.7% in constant currency. Our EBIT came in at 19.6%, a shade above the higher end of our guidance. Net income came in at $1.5 billion, 7.8% growth over the last year. If you look at the overall performance trends. I think one thing we are very proud of is we have delivered consistent performance over the last 4 years. All the 4 years [ have had ] industry-leading growth. If you look at the top 5 India-heritage providers and the top 5 global providers, on the combined, they make up about the top 10 providers in the world. We had the highest growth, highest CAGR over the last 4 years as well as the highest growth in the fiscal that went by. All of this growth has happened by maintaining a stable operating margins. Our cash EPS has grown very handsomely. So earnings per share, cash EPS and earnings per share has also grown quite handsomely over the last 4 years. If you look at the Q4 highlights, per se, from a business perspective, Q4 was the highest booking quarter in fiscal '20, a significant increase over Q3. We signed 14 transformational deals. A big part of these 14 deals were signed sometime in January and early February. But while the momentum was a little slow towards the end of March, but we did sign a few deals in March as well. So pretty much whatever we had, which we expected to close, 90% of them we closed in Q4. Overall year has been very good, 53 transformational deals, and the overall pipeline also looks good as we stand today. The biggest contributor to growth in Q4 was in Mode 2, which grew 7.1% on back of strong demand for some of our digital propositions and cloud offerings. We announced a deal with Stanley Black & Decker, which was a very large deal involving over 1,000 people across different parts of the world. And this is a very strategic engagement where all infrastructure, application and the application modernization and their enterprise packages like SAP, all of that is getting offshored to us. And we won this against a large Indian provider and a top global provider. Our infra business has seen a robust uptick across the year, primarily driven by fluid workplace solutions. A fluid workplace is an offering in our digital workplace solutions. Primarily, it provides a flexible working infrastructure. And this demand has gone through the roof in March, and it will continue. A lot of our existing customers, even where we are not servicing them on the infrastructure side, are looking at us to be supporting them on this front. Another very significant aspect is HCL's software business continued its operational momentum. In fact, this is the third quarter, and we are actually 10 months into the -- after consummation of the acquisition. We have reasonable data points to believe that we are doing exceedingly well in this business. We also looked at expanding our countries. I mean, offshore was largely India so far, but we are expanding into Sri Lanka and Vietnam. Sri Lanka is a location, a country where we've already made a global delivery center operational. And we believe this will also help us derisk the -- or basically rebalance our overall offshore presence. So this is part of a slightly larger strategy that we've embarked on over the last few years. With that, I will hand it over to Prateek, and then I will come back for talking about the future. Over to you, Prateek.

[Prateek Aggarwal, Chief Financial Officer]

Thank you, CVK. [ Kunesh ], I need help in moving the slides because I will not be able to find them in [ someone can assist me ] on the slides.

[C. VijayaKumar, President & CEO]

I can do it. I'll continue [ find the slides ]

[Prateek Aggarwal, Chief Financial Officer]

Okay, thank you. So just taking the -- some of the numbers forward. Repeating the first 2 lines, the first line, rather, revenue growth in constant currency, very handsome 13.5% year-on-year growth for the quarter and for the full year at 16.7%. And just giving you the breakup of the organic versus inorganic. So for the year, 10.7% is where we finally landed up. We have given you -- the last guidance we have given you at the end of previous quarter was a range of 10.5% to 11%, so happy to be guiding in the middle of that range. As also the same for the overall revenue growth, the guidance given was 16.5% to 17%, and we have landed in the middle of it. In this quarter, also, out of the 13.5%, half of it, I mean, 6% of it was driven by organic growth. The balance, 7.5% coming from the inorganic growth, which was largely the acquisition of the select products from IBM, which we concluded at the end of June last year. The EBIT percentage for the quarter was at 20.9%, which is 63 basis points increase over the previous quarter and 174 basis points over the previous same quarter last year. That just reflects the solid cost improvement initiatives that have been taken in the company. You will remember, both March quarter and June quarter of 2019, were some of the lower margins that we saw. And the strong back level to move to a margin level of almost 21% this quarter shows you what can be delivered on this base. For the year as a whole, it was 19.6% EBIT, remarkably completely the same or 3 basis points ahead of the 19.6% that we delivered last year. You might -- some of you might remember that the last year number was actually 19.5% at the time that we announced it. That number has increased to 19.6% because of an accounting change, new accounting standard that we've adopted this year. And we have sort of restated the 19.5% of FY '19 to be now at 19.6%. That is just a small accounting change, about -- which line the interest component of the gratuity cost needs to be shown. It was earlier shown in all the lines above the EBIT. And now it has moved to the Other Income line. It has no impact whatsoever on either the PBT, the profit before tax, or the profit after tax. It's just an in between the lines change. So I just wanted to clarify that, in case some of you might have questions around it. So 19.6% is where we were last year full year, and full financial year this year also, we are at 19.6%. Going below, the tax rate this year has increased. We were at about 19.7% last year, and now we are at 20.1%. There are some onetime benefits we got during this quarter. If you remember, last quarter when I shared the detailed quarter-by-quarter numbers, we were at 22%. But there were some benefits we got this quarter, which took it down to about 21%, 20.9%, which is what gave us the full year net income of 15.6%. And for the quarter, it was at 17%, helped by all the factors that I talked about before. For the full year, also, the earnings per share, the reported number, the diluted, fully diluted number is INR 40.80 on the double the number of shares, obviously, which is a good increase of 10.8% on a year-on-year basis. And the cash EPS, the number that we take right off the cash flow, which we are going to come to in the next page, is at INR 52.80 per share, which has gone up a huge 26.3%. With that, I'll move on to the cash flow page on the next. These numbers are there with you. Unfortunately, it is [ among ] statement, not very visible on this slide here. But if you just make it a big larger, then you can see the 3 key numbers that I want to talk about on this page. The first one, and instead of focusing on all the 4 columns, just focus on the second column with the blue bank. And cash profits is the number that we use to generate what we call the cash EPS. Cash profit was $2,011.8 million or $.2 billion, to put it in a round number. And that is the number, which then divided by the fully diluted number of shares, generates that INR 52.8 per share. That same number was at $1.664 billion the last year. So that has an increase of close to $400 million during the year. The second blue line, the blue line, blue box there is what is called -- what is the OCF, the operating cash flow. And that also has improved to a level of close to $1.75 billion. So that also is a handsome increase of $400 million from the $1.34 billion in the previous year. And if I take the next line item, which is purchase of property and equipment, which is CapEx, you can see $1,723 billion, minus $240.6 million, give you a round number of about $1.5 billion as the free cash flow for the year. All of these numbers, $2 billion, $1.75 billion or the $1.5 billion, very handsome growth over the previous year and numbers which we are very happy to report. On the right-hand side of this page, I'm also given the times of COVID and crisis and all those kind of [ sentiments ] cash is king. And at the end of March, we are happy to report gross cash of about $2 billion plus, $2,031.9 million to be precise, and the net cash of $1.36 billion. Obviously, there is $800 million that we need to pay out to IBM at the end of this quarter, end of June. So even after that payout, the $2 billion gross cash will be still $1.2 billion, which is still a healthy number. So quite pleased with these numbers, happy to share them with you. Moving on to some more color in terms of client categories and all the other breakups in the subsequent slides. The left-hand side of this slide really shows the great increase that we've had in the topmost rung of the ladder, which is $100 million plus category of clients, and that has virtually -- and it's not virtually, actually grown by 50%. So 10 clients who are giving us business more than $100 million has grown to 15. And so on so forth. Down the ladder, you can see $50 million plus has also increased to 30, and so has $10 million plus increased to 171. So happy to report these numbers. And in terms of the right-hand side, looking at the client contribution, there are 2 things that I would reflect here. One is the more systematic trend. As we grow larger, typically the top 5, top 10 and top 20 client contribution would tend to come down. The second factor, which is a unique kind of factor, is the revenue that we used to get through IBM before the acquisition, some of those products, as you will remember, were there in the IP partnership revenues also. So as those revenues move to direct billing to our clients, that stops going through IBM, and therefore, the IBM number in that sense is coming down. So that's something I just wanted to clarify. Also to give you the margin walk, before I go into more details of the loans and the segments. Just wanted to complete the picture on the margin walk, it's a really simple margin walk, just 3 factors. ForEx is the largest. So foreign exchange movements, particularly the rupee movement is the one that gave us the maximum benefit. So out of 63 basis points, 53 basis points actually comes from that. So the balance is really just about 10 basis points. And there are 2 factors within that. There is the amortization cost, which did go up basically in the P&P segment. As you know, as we move more into more and more billing to direct versus coming through IBM, that amortization cost keeps going up. So that went up by about $3 million for the quarter, and that was I think also about 12 basis points. And the balance, 22 basis points improvement, is really the productivity that got generated largely in the ITBS segment. P&T, as you know, was basically flat. So ITBS generated the maximum productivity during this quarter on a quarter-on-quarter basis, which was partly offset by ERS. But overall, it gave us 22 basis points at the company level. Moving on to the next page, so we can just look at -- this is the quarterly picture. On the top is the segment-wise breakup and at the bottom is the mode-wise breakup. I'll focus on the segment-wise. As you can see, the growth in the segment was largely in the ITBS segment this time. ER&D degrew a bit, 1.8%. This was also the segment which took some hit because of the COVID factor because some of the work that we do is working in laboratories for the customers. So that portion took a little bit of hit, so that was a decline of 1.8%. And P&T was basically flat. And looking at the margins, you can see the 19.1% is a good margin that we got in the ITBS, which I spoke about in terms of the productivity just a few minutes back. And ERS, in that sense, the revenue also impacted their margins, so the margins in the ERS segment came down. Product and platform, just like [ revalue ] has been very flat, even their EBIT margins have been very flat, so 32.9% and 32.8%. So that's [ where that ] can be. In terms of the breakup of the modes, Mode 1, 2 and 3. As the table on the bottom shows, the increase is basically due in the Mode 2, which is all the DNA and IoT and cloud and cybersecurity areas. There was some regrowth in Mode 3, but Mode 2 was the one that really grew the business this quarter. And mode 1 was on the flattish side, a slight decline there. I'm sorry, I'm facing a little bout of cough, so just give me a second. So moving to the same breakup for the full year as well. So the mix is the first one in terms of segments, close to 72% in the IT and business services, close to 17% touching now in terms of ERS and 11.5% in terms of products and platforms. And in terms of margins, as you can see, both ITBS and ERS are sort of around that 18%, 19% mark. And the growth of both has been almost the same at 12.7%, 12.8%. Looking at the modes, Mode 1, 2 and 3, the growth has largely been driven by Mode 2 and 3. As you can see, 45% in Mode 3, also helped by the acquisition there as well as Mode 2 growing at 27.6%. Between these 2, they now constitute 34%, 23% of the revenue mix and growing at about 35% on. Moving on to the next page. This gives the breakup by geos and verticals. Instead of focusing on all the 5 columns, I'll focus on the last column, which is FY '20 over FY '19. And that really reflects the last 12 months of FY '20, financial year '20 over FY '19. So that's the 16.7%, and the breakup is given right there, pretty evenly distributed across the geographies. As you can see, both Europe and ROW grew at beyond 18% and the Americas also grew by 15%. And as far as verticals is concerned, manufacturing grew the fastest, and hence, some 20%-plus growth coming both in the NCPG and TME as well as public services. Finance -- technology and services looks a little low here, 2.3%. But remember, it is partly because of the same IBM revenues moving out from being sold through IBM now flowing into the respective verticals. So that 2.3% is, in that sense, depressed because of that. If you look at the first 2 columns in the same row, technology and services, you can see the growth is, on a year-on-year basis, 38.7% and 35.8%, depending on whether you're looking at the quarter or the full year. So that, of course, reflects the methodology by the old methodology, which is putting all the IBM revenues here. So you can see that very handsome growth actually. So that's the notable thing here in this page. Financial Services also grew 11.1% and MS is also at 30%. So happy that all the verticals really contributed in a big way with double-digit growth on a full year to full year basis. Moving on, CVK, I'll just hand it over back to you for a few thoughts on how are we looking ahead.

[C. VijayaKumar, President & CEO]

Sure. Thank you, Prateek. So I want to do this in 3 parts. One is to look at what are the short-term business drivers and what are the new opportunities, and what are the execution priorities for us as we kind of work on FY '21. In terms of short-term business drivers, as I mentioned earlier, the supply side has stabilized for the fluid working model, work-from-home and work-from-office model. But still, there are some minor factors which are at play, like access to labs and some -- these are constraints when people have to move from one engagement to another. Most of the aspects related to access to labs have got sorted out as of this week. I think we have pretty much become [ apportioned ] operational between either work from home or work from office. So supply side has stabilized. There could be -- we do a lot of virtual onboarding, but there are some specific situations where certain background checks have to be done and things like that, which are slightly getting delayed, but it's a very insignificant impact. In terms of demand side, what we have done is we've looked at all the key things that the customers are asking for. And we have a good grip of what these asks from the customers are. One is, of course, very straightforward. There are a lot of customers where they do volume-based billing based on number of employees or number of servers or applications that we support. Some customers have put a lot of their employees on furlough so to that extent, there will be a reduction in volume base to billing, which is a pretty straightforward contractual thing that will kick in. Discretionary spend itself in segments which are B2B2C or B2C, discretionary spend is not being deferred. But segments which are pure B2B, there is some deferral of discretionary spend. Some new projects, which were -- which is what we call an [ EN ] business, new business from existing customers. So obviously, customers have put some of that on hold. I mean, they have not canceled them in most parts, but they have kind of temporarily delayed some of the work. And there is a little bit of price discount. There are some customers who are very strong businesses, very strong brands. But the current situation has kind of significantly impacted their business so they are asking for price discounts. Most of the times, the discounts are very temporary, either for 1 quarter or at most for 2 quarters. We have not seen anyone wanting to fundamentally renegotiate any of our long-term contracts. There are payment term extensions from 30 days to 90 days, depending on the customers. Maybe a small segment of customers are also looking at payment term extensions. We've done a very detailed analysis of our portfolio by industry and service line. While we report 7 or 8 verticals to the market, I think exactly we report 7 verticals for the market, but internally, we track close to 40 subverticals across these 7 verticals. So -- and then we classified them as top impacted verticals and the low impact verticals and the top insulated verticals. As you can see, the top impacted is largely in manufacturing. And if you really break that down into sub verticals, it will be automobile and aerospace. These are the 2 sub verticals, which we see big impact. Entertainment, definitely, we have big parks that we support, entertainment parks. We do some work for companies which are supporting the casinos and things like that. So those are impacted. And the nonessential retail is another segment which is impacted. I would say these are the top impacted verticals. We see financial services and telecom as low impact verticals. Financial services per se, while -- I mean there is an expectation that this could get impacted in a significant way. But in all of our conversations with all of our top customers in financial services, we are seeing very minimal impact. But there are a lot of customers for whom we are doing significant amount of scaled digital kind of programs. And they're all enabling more digital banking and digital channels for our customers. So that continues to be a big priority for them. And we are also seeing a trend of vendor consolidation here as well. Some of them will play out in the long term. But in the short term, there are a lot of small vendors who could not deliver. And that work is getting consolidated in ones and twos in financial services, and we are getting some good share of that. But similarly, telecom continues to be very strong. So the impact is low. And the life sciences has -- I mean, it's fairly insulated. I mean we look at life sciences and health care in 4 parts. One is pharmaceuticals, payers, providers and medical devices. Pharmaceuticals are strong. Payers, right now, we have not seen an impact, but maybe we will see some impact as things go ahead. Health care, of course, there is a lot of work that we are doing now. But almost all the hospitals are under significant stress because their profitability has seriously taken a negative turn, because they're all focused on COVID, the elective surgeries are very less. So that's one thing. And because elective surgeries are less, some medical device companies are also impacted. But overall, as a portfolio, life sciences and health care, which contributes to maybe 12% of our revenue, we think it's fairly, fairly intact. Technology services as well, which is a pretty large vertical for us. We believe there is going to be continued momentum in that vertical. I mean, as I said earlier, there is good demand in some weak verticals like oil and gas could be weak, but there is some good momentum and some run the business consolidation work. So as well as there is a weak demand in perceived strong verticals, like telecom is expected to be strong, but there are some client-specific issues because of which there could be some impact in the coming quarter. In all this, the way we are looking at it is, our first priority is to enable every client in all possible ways because the demands are varied. And all the customers are very large brands, very reputed brands, and we believe their businesses are all absolutely sustainable businesses and long-term businesses. So in the short term, investments that we will make will be rewarded in the medium term and long term. And this hypothesis has always worked for us. Be it in the 2008 or other scenarios, this has worked very well. And I think this is a playbook which we will continue to work on. So FY '21 [ itself ] will evolve quarter-to-quarter. There are multiple scenarios that are playing out. One scenario is we will see a decline in Q1. Q2, it will stabilize. And Q3 and Q4, which is H2, we will see some growth. That's the most likely scenario that we are working on. But there could also be a situation where there is the resurgence of virus in the next few weeks or months, in which case, the stabilization may happen in Q2, and there could be some dip in Q3. That is some kind of a worst-case scenario. But we are still preparing for something like that as well. So mostly, the dynamics is going to be driven by business portfolio and the relevance of our propositions. And we feel pretty strong about how they will play out in the mid to long term. Moving on, I want to cover a few medium-term propositions, which are really seeing good traction. First is Fluid [ for ] digital workplace. We have -- this was a proposition which was fully ready. We had very good client references. So we've gone on a hyper marketing, digital marketing office proposition to all our clients. There is significant interest, largely in our existing clients. In infra clients, most of them, we do this. But in the non-infra customers, we see good demand for this. Of course, I mean, it's very well known by now that digital transformation itself is going to accelerate. What was expected to happen in 2 years or 3, 5 years is all going to happen in the next couple of years, maybe even in a few quarters. So the biggest element here is everything the customer interactions are all going to be driven around 0 touch through digital channels, monetizing the content, having brand loyalties are reducing. So customer loyalty programs, all of that is where we are seeing stronger -- strength that we have, and we think there is a good market pickup of this. Cloud consumption, we think, will double primarily because as people do want to avoid CapEx and they prefer an OpEx route. That's one reason. Obviously, the flexibility that cloud offers, even though the cost of -- total cost of ownership could be a little higher, we think this will kind of accelerate. But however, a lot of cloud consumption doubling will happen because of significant amount of new applications like the gaming, telemedicine, virtual tourism, which some of our clients are already thinking of and conceptualizing some programs. Cybersecurity is going to be an absolutely top-of-the-mind kind of proposition, especially in this kind of working environment, which is very fluid. We also see some emerging opportunities in engineering services. 5G itself is going to make a lot of virtual [ everything ] possible. So that's going to drive some amount of testing, sustenance, validation and compliance-regulated spends through IoT and other things. I think overall, service providers with scale and strength will -- in areas like workplace, security, cloud migration and strong partnership with the cloud providers and scale digital proposition, I think, will gain and we are very, very strongly placed in every one of these propositions. Moving on, if you want to look at some medium-term market opportunities, I think the biggest inflection point is going to be in the health care industry. Basically scaling up of all the telemedicine, virtual consultation, all of that is going to be the big teams and the providers. In the payer segment, obviously, most of them, if you look at the U.S. landscape, most of them are -- have significant legacy landscapes and their costs are completely out of proportion. So there's going to be a lot of simplification and modernization, which is absolutely the must for their survival. So we think that will pick up. Telecom and the technology is also going to kind of be strong verticals market opportunities, whether it is cloud adoption, driving further demand for telecom infrastructure, for 5G-led solutions and some of the topics that I talked about earlier. But similarly, retail consumer services, travel and hospitality. Primarily, these businesses will have to completely redefine themselves and a lot of this redefinition will happen through some new technologies, which is like digital engagement, IoT, conversational AI, et cetera. Financial services, the digital channel is going to kind of significantly accelerate. So that is going to drive certain new ways of working, more automation and more modernization. We are also looking at certain strategic decisions led by certain opportunities for providers with a strong track record in execution capabilities. If I were to call out the 3 things here, there are good carve-out opportunities for captives, there are product carve-out opportunities, professional services, outsourcing by software companies and vendor consolidation, these are some good opportunities. This vendor consolidation is going to be ones and twos that I talked about, but fairly large sums of revenue, which is typically boutique digital firms who are delivering work for some of the banks and others, we think there is a good opportunity. Not only banks, even in other retailers and companies, we think there's a good opportunity. There is going to be a significant cost cut mandate across various industries, which will increase the penetration of outsourcing business in underpenetrated markets and some clients. Another trend that we are seeing, already a couple of large RFPs are out, is rebalancing of the global delivery model. Some of the large clients have significant presence in India, either by -- through service providers or through captives. But there is definitely a big urgent push to do a little bit more rebalancing. That's something which is playing out as well. With this backdrop, I will just summarize it by saying what are our execution priorities. Obviously, the first focus is client commitments. Absolutely, we want to deliver everything and make sure our clients continue to be very delighted with what we are doing. So this is really the base capability that we want to continue to execute very well on. All the transitions, while we find the 13 transformational deals last quarter, none of them are on hold. Everything is already under transition. So we have come up with a no-touch transition or 0 touch transition. And 1 client who got signed after the India lockdown, we signed the contract, we are already transitioned, we are already live. So there are many -- some of the large deals would go live in the next quarter, which is July, August, September quarter. So far, this is very successful in whatever engagements that are happening. Renewals are all on track. We are tracking renewals in a very granular level. Every project, which is expiring, we are trying to find out what can be done to make sure customers can either renew those programs or how we can reutilize some of the bright talent that we have in these engagements. I talked about emerging opportunities. So we have launched propositions around these opportunities, and we will continue to push this very hard because my expectation is our pipeline, by end of next quarter, should look significantly different from what the pipeline that we had when we started the quarter. In terms of managing the costs and profitability. There is a significant focus in very, very granularly managing utilization, productivity and billing. So pretty much, there are daily standard costs across different divisions, and it's being managed very well. People cost, I mean, we absolutely don't want to make any impact to our employee experience, no changes in the benefits. There will be some impact on variable pay, which is going to play out based on the performance of the businesses. However, there is significant opportunities in nontravel costs. Most of them are pretty much straightforward travel marketing. And in the infra business, we have a significant chunk of third-party services, which are also dependent on volumes so they would naturally scale down when the revenue scales down in these areas. We will also leverage or enhance our focus on global delivery centers because we think there is going to be -- while offshoring will continue, but there will be some more emphasis on bringing some work within the geographies, so we will continue to strengthen our geography footprints and also derisk the overall country consideration. Risk and compliance is among the highest focus areas at this time. While so much work is getting done remotely, we are reeducating, recertifying all our employees to be fully familiar with all the requirements that we have to meet with. So we are doing everything to enable and empower our employees to deliver to meet client expectations. I think that brings us to the end of this presentation. We also have several members of the leadership team on the call. And now we can take questions.

[Operator]

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

[Ankur Rudra, Research Analyst]

And thanks for the very detailed commentary, CVK, just if you could elaborate on -- I understand the reason why you may not want to give a guidance this time. But how would you quantify or qualify your visibility on the order book you have entering into this year versus maybe a year ago? And how does that help you get visibility on controlling the business going forward?

[C. VijayaKumar, President & CEO]

Yes. So Ankur, thank you. I hope you're doing well. And from an order book perspective, the order book is significantly higher than what it was when we exited FY '19 versus FY '20, it's significantly gone up. But you would know that order book has multiple aspects, in new deals won, renewals and some business, which has lost. So we report this as a part of our remaining performance obligations. And I'm sure you can look at it. I think there is at least a 12% increase in our order book on a like-to-like comparison. Though there are some exclusions there like royalty revenues and revenues which are based on some variable parameters are excluded. But on a like-to-like basis, we think our order book is significantly higher this year compared to last year. And further, if I want to look at the pipeline compared to what it was in the end of December to the end of March, there is a reduction in pipeline, primarily because every quarter, we get a good chunk of new deals going into the pipeline. Towards the second half of the quarter, that new deal pipeline has slightly come down. However, we are tracking this on an everyday basis. If you look at what happened in the last 5 weeks, maybe if I were to divide that into the first 2 weeks of the quarter and the second 3 weeks of the AMJ quarter. In the second 3 weeks, we are seeing a good increase in pipeline. There are many deals which are coming up. So I would think the pipeline now, rather than 31st March, is much better than what it was at the end of December.

[Ankur Rudra, Research Analyst]

And CVK, is that mainly on these areas you mentioned around digital transformation, fluid workplace as opposed to the broader broad-based pipeline earlier, so you probably see more concentration of the conversations happening then?

[C. VijayaKumar, President & CEO]

Yes. I mean, of course, one is definitely on the -- some of the new propositions. But I think there are at least 3 or 4 consolidation opportunities as well, which has showed up in our existing customers where we are reasonably in good situation.

[Ankur Rudra, Research Analyst]

Just one follow-up for me. You obviously ended the year with very strong cash flows and cash EPS. However, if one looks at the overall payout ratio for FY '20, it's clearly a lot lower because there wasn't a buyback this time or a special dividend to compensate for that. Just want to understand, is there an intention to lower payouts maybe to conserve cash for more acquisition, M&A in the short term? And how would you think about capital allocation policy in the medium to long term?

[C. VijayaKumar, President & CEO]

Yes. Prateek, you may want to take that?

[Prateek Aggarwal, Chief Financial Officer]

Yes, sure, CVK. So Ankur, the payout ratio, as we have mentioned, I think, in several one-on-one meetings with investors and potential investors as well. For the moment, we are sticking to the INR 2 per share, which actually is on double the base of number of shares post the 1:1 bonus issue that we did at the end of December. As you can imagine, these are turbulent times, and we don't want to sort of fritter away the cash at this point in time. Because one, we have the IBM payout to be done. So even though $2 billion is there in gross cash, that does come down to $1.2 billion post that payout, which is due at the 30th of June. And also because these are the times we would like to keep investing in business, both organically as well as inorganically, as we tied through these trouble times. And this is not the time we thought appropriate to sort of go for a big value payout.

[Operator]

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

[Sandeep Shah, Vice President]

Sir, just your -- based on your commentary, it looks like you are saying the Q4 order book being highest in the last 4 quarters. And most of these deals have under transition as a whole. So is it fair to say that Q1 may see a decline in the revenue, but your decline in the revenue could be lower than the industry, which we perceive as close 5% to 6% Q-on-Q dip? Is it a fair assumption to make?

[C. VijayaKumar, President & CEO]

Sandeep, honestly, I don't want to hazard a guess on what Q1 will be. So it's -- there are too many unknowns, and I would not say anything on Q1. I told you what the factors which are driving the demand side and what are the factors which are driving the supply side. And a lot of deals that we won in Q4, most likely, the revenues will start flowing in only from Q2, and I want to leave it there, Sandeep.

[Sandeep Shah, Vice President]

Okay. And just the second question in terms of the margin in the P&P business. So I think it's really handsome at 32%, 33%, which has been stable last 3 quarters. Is it fair to say that in a rupee scenario of 75, 76, this kind of a margin is likely to continue even in FY '21, despite there could be some amount of pressure in terms of renewal of license? And how to look the renewal of the license in the products and platform business, especially in a COVID scenario? Will it also see a similar kind of business pressure? Or you believe if there could be a higher or lower pressure than the same?

[C. VijayaKumar, President & CEO]

Yes. So maybe we will answer this in 2 parts. Let me let Darren comment on the revenue and what is the kind of impact due to COVID on the P&P business. A large part of it is to software. And Prateek can kind of provide a commentary on the margins. Darren, over to you.

[Darren Oberst, Corporate Vice President of HCL Software]

Yes. Thank you. What we've experienced over the last couple of months is that we've continued to see strong velocity and volume on renewals. So to date, we've seen very little impact from a COVID point of view. To some degree, that's a reflection of the criticality of these products, the fact that the customer base is very distributed globally and by industry. And it's also, even where there are some headwinds, it's countered by some areas where many of these technologies are even more critical. So even in industries like retail or in hospitality, which, again, are relatively small segments of our total customer base. For those customers, areas like doing e-commerce with our commerce software, areas of collaboration and communication with partners with their employees, critical areas around security, all of these are areas where they're either sustaining investments, or in some areas, increasing investments. So far, I think the way that we're seeing it, we have good confidence. That from a renewal point of view, again, we're going to continue to see good velocity, good volume and pretty good stability from an overall pricing point of view as well.

[Sandeep Shah, Vice President]

Okay. Okay. And if you can answer, you or Prateek can answer regarding the sustainability of the margin in the production platform because there could be further upside considering the current spot rate of 75, 76 where we believe that in this kind of a business, rupee depreciation should largely flow through to EBIT margins?

[Prateek Aggarwal, Chief Financial Officer]

Yes. Sandeep, let me take that. So yes, exchange gains did help us kind of maintain that same 32.9%, 32.8% kind of margins this quarter, and that certainly flows through. But as we know in this business, and as we have referred to even in the commentary upfront, the amortization would continue to go up till the time we are completely on 100% HCL paper invoices rather than going through IBM, which will take a while. So amortization is the cost that continues to go up in this business quarter-on-quarter. We also continue to invest a little more incrementally on the sales and marketing side, both marketing of the products and the sales force that is selling there. So therefore, those costs will sort of continue to creep up. We are happy to see the incremental revenue on a year-on-year basis because that's the right way to calculate that. This quarter, it is more than $160 million plus incremental revenue. So the guidance that we had given you at the time of signing the deal, 625 going up to 650 is playing out the way we expected it to. And that's definitely helping us maintain the margins. But as we have always said right from the beginning, the guided margin for this business is more like 30% plus is what we have said. In the initial few quarters, first 3 quarters that we've been running this business now, we have delivered a little higher. But the guidance on a medium to longer-term basis would continue to be around that 30% plus.

[Sandeep Shah, Vice President]

If I can squeeze the last one. In terms of how to look at engineering R&D business because that contributes 16%, 17% of your business. So in a COVID scenario, being a project-based business, it will have a slightly higher pressure and that also coincides with the exposure to manufacturing sector, if I'm not wrong.

[Prateek Aggarwal, Chief Financial Officer]

CVK, would you like to take it or GH?

[C. VijayaKumar, President & CEO]

Sorry, sorry. GH, can you take this question? Sorry, I was on mute.

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

Yes. I think it is -- yes, Engineering and R&D Services, we have 2 segments. One segment is based on online and mostly telecom, which is not impacted by COVID impact. We don't see much of difference in demand scenario pre-COVID to post-COVID. However, as you mentioned, there are segments which are exposed to manufacturing where we have both supply side as well as demand-side issues at this point of time. The supply side is mostly because have to do some work necessarily from the lab or customer sites in manufacturing. So that probably is coming to some control now. But, however, since the supply chains for our customers got disrupted, we do still have some demand-side issues in this part of the business, especially segments like aerospace and automotive. Our industrial manufacturing areas, we do have some pressure.

[Operator]

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

[Sandip Kumar Agarwal, Vice President]

I have just one question, CVK. You ended the year so strongly, and the margins have also done extremely well. But my question is that why you are saying that Q1 will see a negative -- such as a sharp negative impact because we are seeing broadly in Q1 things have started returning to normal. And secondly, you will have a big tailwind probably from the cloud work, which will get to in the current situation. On the top of that, you have a very strong deal exposure in the current year. So I just want to understand that whether you know our production side can give us more serious than we can participate because primarily, sales may not happen at the same pace due to the current situation. Or do you think there is something more or more uncertain because of which you don't want to commit anything, number one. Number two, on the margin front as well, while I understand that there will be some cost pressures, you being able to manage our operations in a way because there will be obviously some potential savings as well that we can maintain our margins at current level. So just want to understand, I'm not asking for any particular guidance, and thanks for taking my question again.

[C. VijayaKumar, President & CEO]

Yes. Thank you. Sandip, a lot of questions all combined into yours one question. See, first of all, let me clarify, as Darren just explained, P&P business will see very minimal impact due to COVID. That's what we have seen so far. All our analysis indicates we'll have very minimal impact in the P&P business due to COVID. Coming to why are we seeing negative in the Q1. I think a lot of deals that we closed in Q4 are likely to translate to some revenue in Q2 of this fiscal. So Q1 will actually be kind of preparing for transitions and getting transitions kicked off. And as we explained in terms of constraints, largely, we have overcome all the supply-side constraints. And you will see that I talked about several demand-side headwinds in certain verticals, whether it is volume-based billing or customer discounts, especially in the verticals that I pointed out. So that is where the uncertainty is. And in this -- I mean, things -- a lot of things are moving around. So we don't want to make a commitment on what our Q1 will be or the full year will be. But overall, Sandip, the way you should look at this is we are coming into this crisis from a position of strength. We've grown very well over the last 4 years. Our organic momentum has accelerated over the last 3 years, hitting a peak this year, almost 11% organic growth, which is the highest in the industry. A lot of investments that we've made in our Mode 2 offerings, whether it is digital, fiber, cloud, IoT, all of them are yielding very good results. Even this quarter, you would see that has gone up by 7% sequentially. Year-on-year, it has gone up by 30-odd percent. So that momentum is what we invested for and we think that is something which is going to be very helpful. So we are entering this phase with a lot of strength. So maybe there is a quarter or 2 of uncertainty, but we do believe there are all the short-term and medium-term and propositions and the industry trends will start looking very good as we get into H2, provided there is no resurgence of this virus and the current kind of tapering continues. I would leave it there, Sandip.

[Operator]

The next question is from the line of Sumeet Jain from Goldman Sachs.

[Sumeet Jain, Equity Analyst]

Congrats on good execution. So a couple of questions. Firstly, I had for Prateek, where I think, Prateek, you mentioned that you are on your target for $625 million to $650 million revenue business from the acquired IBM products. So I just want to understand. I think based in my calculation, you are currently running at $400 million to $450 million kind of range for the first 9 months. So are you expecting a significant uptick in Q4 in the P&P business, maybe because of seasonality or higher acceptance for the products?

[Prateek Aggarwal, Chief Financial Officer]

So Sumeet, thank you for that question because it does give me the opportunity to clarify. I -- what I was talking about was the run rate of incremental. That's the 160 number that I talked about, and I was just multiplying it by 4 to come to 640. And that is what I was talking about. What we started off as a slow start in September quarter is something which relates and not sort of trying to make that up in the next quarter or anything like that. What I'm talking about is that the business has -- for the second quarter running, being able to generate the kind of incremental revenue that we expected it to and that we are kind of back on track, stabilized and running for more is the hope that we have.

[Sumeet Jain, Equity Analyst]

Right. Got it. And just a follow-up question, I guess, since you are now running these for several quarters now. And I think the collaboration kind of tools are seeing incremental demand in the market in work from home arrangements. So what kind of acceptance levels are you seeing for some of these products and from the new deals or new clients getting in the market?

[C. VijayaKumar, President & CEO]

Darren, do you want to take that? It's mostly around HCL software.

[Darren Oberst, Corporate Vice President of HCL Software]

Yes. I mean, if I'm understanding your question, it's about winning new customers in the market?

[Sumeet Jain, Equity Analyst]

Yes.

[Darren Oberst, Corporate Vice President of HCL Software]

And -- okay. So look, our first objective when we sort of took over these products 10 months ago was first, really stabilizing and energizing existing customer base with huge volumes, transactional volumes of renewals. So that was goal number one. The second goal then was modernizing the products. And what we announced towards the end of JFM in March were major new releases of several of the products. So over the course of the last year, we largely achieved our goals from a product release and road map point of view, major new releases of DX, Domino, AppScan, BigFix. We just released a new product called Volt, which is a new low-code capability to bring to all of those domino customers. We had a major new release of Unica. Then we have several other major new releases coming later this quarter. So that was part 2, was really reenergize, really bring a lot of innovation and high-end features to those products. And then step 3, which I think is what you're alluding to is to drive new growth. Once we've stabilized the customer base, once we've invested in innovation in the products, go expand the market reach. So we've been tracking actually our new customer footprints over the course of the first 3 quarters. And it's about 150 across the product set. And across every single one of our products, we're winning new customers. The products where we have the most new customer footprint adoption, as you would expect, are in the security area, so products like Big Fix and AppScan. But we're winning new customer footprints across our entire portfolio. We're also seeing a lot of new license growth, again, across multiple geographies and across multiple products. So I think to date, we've really emphasized the first couple of blocks of that strategy. I think what you'll hear more and more from us throughout FY '21 are those proof points and validations in terms of new customer adoption and growth that we're seeing across our product set.

[Sumeet Jain, Equity Analyst]

Got it. Thanks, Darren, for that clarity. And maybe one more question, if I can squeeze for CVK in terms of the infra management business there. Clearly, you are seeing a lot of demand for the lower migration and enabling your client employees to move to work from home. So how you are seeing that tailwind working against the headwind of pricing pressure in your legacy side of the business? If you can give some clarity.

[C. VijayaKumar, President & CEO]

Yes, sure. I mean infra business, I mean, overall, if you look at ITBS, we've delivered significant growth, close to 12.8%. Pretty much all of that is organic growth. So infra business, overall momentum is good. Of course, there is some dynamics around pricing and renewal pressure and things like that. But most of them are stabilized, I would say. And there is significant opportunities in the new areas. So I think in the medium to long term, I do feel very positive about how we will continue to do on the infra business, including all the cloud migration opportunities where we now have very strong partnership with all the hyperscalers. There are many accounts where we are proactively looking at cloud migration. And mostly, for a lot of new applications, we become the app modernization partner in the cloud migration kind of tags along, and that's how we are looking at this business, Sumeet.

[Operator]

The next question is from the line of Sudheer Guntupalli from Motilal Oswal.

[Sudheer Guntupalli, Research Analyst]

My first question is in terms of Mode 2 margins. I think during the quarter, it seems to have shown a good amount of an uptick. And in one of the prior quarters, we have also highlighted that we are exiting some offerings or ramping down some offerings in this business in Mode 2. So where do we see the steady-state margins in this segment?

[C. VijayaKumar, President & CEO]

So Sudheer, there is certain kind of one-offs in this quarter, so that is where you will see a slightly larger increase in margins in this quarter. But structurally, we believe these margins will gradually improve. So I think from a year perspective, we came in at 15.2%. Possibly, last year was much lower. So we will see this gradually improving, but nothing dramatic because this business is an area where we are continuing to invest. And as I said earlier, the gross margins are high, but our investments in practice and all of that is what is bringing the EBIT numbers lower than the company level. So you will see some kind of marginal increase as the quarters pass by or more from a year-on-year perspective, but I wouldn't read too much into a significant increase in margins in the Q4. So I hope that answers your question.

[Sudheer Guntupalli, Research Analyst]

Sure, sir. And any color on the nature of the runoff and adjusting for that, what would have been the actual margin?

[C. VijayaKumar, President & CEO]

I think you should just look at the yearly margin, Sudheer. That would be the right representative margin of the business.

[Sudheer Guntupalli, Research Analyst]

Sure. My last question is to Prateek. In terms of the impending large payments towards IBM for the acquisition of the 7 products, did we explore the option where we can reflect the deferral of payment given the force majeure kind of a situation? That seems to be the trend of the day that most of the companies tend to conserve as much cash as possible on the balance sheet. Or are you being comfortable on making this payment on a timely basis?

[Prateek Aggarwal, Chief Financial Officer]

Right. Sudheer, thank you for that. I think the answer is very simple. We don't see the need to request a deferral or anything of that sort. I think we have $2 billion of gross cash on the balance sheet is a healthy number. We have done, of course, all the stress testing for various quarters in the future and come up with -- even in the worst-case scenarios, we continue to have good gross and net cash. So there was no need to basically look at something like that.

[Operator]

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

[Ashwin Mehta, Research Analyst]

CVK, 2 questions. One is in terms of the Products and Platforms business. Where are we in terms of transferring contracts from IBM on to HCL Tech, either in terms of revenue or overall customers?

[C. VijayaKumar, President & CEO]

So it's largely on track. I mean every quarter, there are some renewal books which come where we need to go back and renew with the customers. So largely on track. But as we had explained earlier, a big part of it will get over when we finish one full year. But there will be a long tail, which may run into the second and third year. So it's on track.

[Ashwin Mehta, Research Analyst]

Okay. So most likely in the next 2 to 3 quarters, the substantial portion should be transferred on you next year. The second question was that, historically, we've talked about that cannibalization of data center services due to cloud migration should reduce as deals post-FY '16 were largely cloud-led. Now with cloud migration accelerating further, would this change be still additive to our IMS revenues on a net basis?

[C. VijayaKumar, President & CEO]

Yes. I think, see, there are 2 factors, right? So cloud migration will accelerate, which is given. But the market that we can go after is also increasing because a lot of mid-sized customers are looking at cloud as moving everything to cloud as an option. So the new business, a number of deals that we signed in the last couple of years are all in cloud kind of solutions as well in the mid-sized customers. So I think it is only going to be additive to the business. That's the way I look at it because there will be a lot of service revenues. In some cases where we are hosting a product on cloud, maybe it will include the consumption as well. So net-net, I think it will be positive for us.

[Ashwin Mehta, Research Analyst]

And just the last one, if I can squeeze. So in terms of captive carve-outs, any particular verticals that you have seen a higher trend in terms of people looking for captive carve-outs or it is much more broad-based?

[C. VijayaKumar, President & CEO]

It's more broad-based from what we are seeing. I mean it's not that everybody is saying we want to carve-out a captive. It's more a proactive pitch to some of our customers to really build a value proposition of our ability to run this better and service them better. So this one is something which we are largely looking at in our existing clients, some of them who have captives. We are looking at that as an opportunity. It's still early stages on the captive carve-out. We think there is a strong proposition and there is some interest, but we have to see how this will play out.

[Operator]

Thank you. 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. Thank you. And in closing, I want to once again reiterate that we've had a very good year, and we've really delivered industry-leading growth for the last 4 years while maintaining our profitability. Our strategy of organic and inorganic growth has definitely paid these dividends. Some of the -- most of the inorganic acquisitions that we have done have delivered very good results. We feel very positive about it. And we are entering the space with a position of strength. We have a stable leadership team. We have good momentum in the business, barring the current disruption. And all our investments in IP-led opportunities and all the Mode 2 opportunities and the new propositions that will come much more strongly, much more relevant in this scenario, all of that, we are well placed. So as a company, I feel very confident. Even though the circumstances are very unique and special now, our capabilities, our business mix, our strong client relationships and the financial strength will see us through this space. I feel extremely confident that we will emerge stronger than ever from this crisis. So with that, I want to conclude the call. All of you stay safe and stay well. Thank you for joining the call today.

[Operator]

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